diversified portfolio

203 results back to index


pages: 363 words: 28,546

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

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

This low correlation meant that the risk of an internationally diversified portfolio could be lower than that of an all-U.S. portfolio. Over the period from 1970 (when the EAFE index begins) and 2009, for example, the correlation between EAFE and the S&P 500 index is only 0.60. The effects of this low correlation have often been illustrated using a horseshoe diagram like that found in Figure 5.8. The horseshoe shows various portfolios of U.S. and foreign stocks ranging from an all-S&P 500 portfolio (at the lower right end) to an all EAFE portfolio (at the higher right end). The powerful message of this chart is that diversified portfolios of foreign and domestic stocks have the dual benefit of lower risk and higher return.

There is an all-American portfolio consisting of 75 percent invested in the S&P 500 and 25 percent in the medium-term Treasury bond. The diversified portfolio replaces one third of the stock allocation, 25 percent of the whole portfolio, with foreign stocks. The portfolio containing EAFE has a higher return and lower standard deviation. So the Sharpe ratio is also higher at 0.41 as opposed to 0.37 for the all-American portfolio. That is not much of a difference, but it translates into 0.4 percent excess return for the diversified portfolio.12 The second set of portfolios is for a shorter period beginning in 1979. This set of portfolios replaces the S&P 500 with the Russell 3000 all-cap P1: a/b c05 P2: c/d QC: e/f JWBT412-Marston T1: g December 8, 2010 17:36 Printer: Courier Westford 87 Foreign Stocks TABLE 5.5 Performance of Portfolio with EAFE Added Portfolio A (1970–2009) Without EAFE 25% EAFE Portfolio B (1979–2009) Without EAFE 25% EAFE Geometric Average Arithmetic Average Standard Deviation Sharpe Ratio 9.7% 9.9% 10.0% 10.1% 12.0% 11.2% 0.37 0.41 11.0% 10.8% 11.2% 11.0% 12.2% 11.6% 0.47 0.47 Portfolio A: Portfolio without EAFE consists of 25 percent in medium-term U.S.

What if foreign stocks were constrained in the internationally diversified portfolio? Suppose that foreign stocks are constrained to be only 40 percent of the total stock allocation so foreign stocks are 28 percent (i.e., 40 percent of 70 percent) of the overall portfolio allocation. The result is reported in the top half of Table 8.1. Investing 40 percent of the stocks in the EAFE index, the average return rises from 10.1 percent to 10.3 percent, while the standard deviation drops from 12.0 percent to 11.3 percent. The higher Sharpe ratio of the internationally diversified portfolio adds an extra 0.4 percent to the risk-adjusted return.


pages: 317 words: 106,130

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

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

., m = 2), the investor can have a great deal of confidence that the bond floor will not be violated. In this case, the portfolio manager will invest the following amount in the diversified portfolio: 66 = 2 × (100 − 67 ) The remaining 34 will be invested in Treasuries. Suppose the bond floor increases to 70, the investment in Treasuries grows 36 and the investment in diversified portfolio grows to 73. The reallocation is determined as follows: 78 = 2 × (36 + 73 − 70) This means that the total investment in diversified portfolio should increase from 73 to 78. The net investment in Treasuries will be 31 = 36 + 73 − 78. This procedure is followed until the note matures.

As an alternative, the number of calculations can be significantly reduced if it is assumed that returns are driven by only one factor (e.g., the market portfolio). Note that this does not assume that CAPM holds. In other words, suppose we use a simple linear regression to estimate the beta of an asset with respect to a well diversified portfolio. Rit = α i + βi Rmt + eit The rate of return on the asset at time t is given by Rit, the rate of return on the diversified portfolio is given by Rmt, the intercept and the slope (beta) are given by αi and βi respectively. Finally, the error term for asset i is given by eit. Suppose we run the same regression for another asset, denoted asset j. If the error term for asset j is uncorrelated with the error term for asset i, then the covariance between the two assets is given by Cov (Ri , Rj ) = βi β jVar (Rm ) Notice that to estimate covariance between the two assets, we need an estimate of the variance of the market portfolio as well (Var(Rm)).

ASSET ALLOCATION IN TRADITIONAL AND ALTERNATIVE INVESTMENTS: A ROAD MAP A seminal study by Brinson, Hood, and Beebower (1986) demonstrated that as much as 93.6% of variation in returns in quarterly performance of professionally managed diversified portfolios could be explained by the mix of the asset classes (security selection explains the rest).5 Recent research however, has also shown, that while over 90% of the return volatility of a diversified portfolio through time is explained by its allocation to broad asset classes, a somewhat smaller portion of that portfolio’s total return over the same time period is explained by its allocation to various asset classes.


pages: 416 words: 118,592

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

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

In 2010 investment-grade bonds yielded about 6 percent, whereas “junk” bonds often yielded 8 percent. Thus, even if 2 percent of the lower-grade bonds defaulted on their interest and principal payments and produced a total loss, a diversified portfolio of low-quality bonds would still produce net returns comparable to those available from a high-quality bond portfolio. Thus, many investment advisers have recommended well-diversified portfolios of high-yield bonds as sensible investments. There is, however, another school of thought that advises investors to “just say no” to junk bonds. Most junk bonds have been issued as a result of a massive wave of corporate mergers, acquisitions, and leveraged (mainly debt-financed) buyouts.

There were many villains in this morality tale: the fee-obsessed underwriters who should have known better than to peddle all of the crap they brought to market; the research analysts who were the cheerleaders for the banking departments and who were eager to recommend Net stocks that could be pushed by commission-hungry brokers; corporate executives using “creative accounting” to inflate their profits. But it was the infectious greed of individual investors and their susceptibility to get-rich-quick schemes that allowed the bubble to expand. And yet the melody lingers on. I have a friend who built a modest investment stake into a small fortune with a diversified portfolio of bonds, real estate funds, and stock funds that owned a broad selection of blue-chip companies. But he was restless. At cocktail parties he kept running into people boasting about this Net stock that tripled or that telecom chipmaker that doubled. He wanted some of the action. Along came a stock called Boo.com, an Internet retailer that planned to sell with no discounts “urban chic clothing—that was so cool it wasn’t even cool yet.”

Buying and selling, to the extent that it is profitable at all, tends to generate capital gains, which are subject to tax. Buying and holding enables you to postpone or avoid gains taxes. By following any technical strategy, you are likely to realize short-term capital gains and pay larger taxes (as well as paying them sooner) than you would under a buy-and-hold strategy. Thus, simply buying and holding a diversified portfolio suited to your objectives will enable you to save on investment expense, brokerage charges, and taxes; and, at the same time, to achieve an overall performance record at least as good as that obtainable using technical methods. HOW GOOD IS FUNDAMENTAL ANALYSIS? How could I have been so mistaken as to have trusted the experts?


pages: 482 words: 121,672

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

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

In 2014 investment-grade bonds yielded about 4½ percent, whereas “junk” bonds often yielded 5 to 6 percent. Thus, even if 1 percent of the lower-grade bonds defaulted on their interest and principal payments and produced a total loss, a diversified portfolio of low-quality bonds would still produce net returns comparable to those available from a high-quality bond portfolio. Many investment advisers have therefore recommended well-diversified portfolios of high-yield bonds as sensible investments. There is, however, another school of thought that advises investors to “just say no” to junk bonds. Most junk bonds have been issued as a result of a massive wave of corporate mergers, acquisitions, and leveraged (mainly debt-financed) buyouts.

There were many villains in this morality tale: the fee-obsessed underwriters who should have known better than to peddle all of the crap they brought to market; the research analysts who were the cheerleaders for the banking departments and who were eager to recommend Net stocks that could be pushed by commission-hungry brokers; corporate executives using “creative accounting” to inflate their profits. But it was the infectious greed of individual investors and their susceptibility to get-rich-quick schemes that allowed the bubble to expand. And yet the melody lingers on. I have a friend who built a modest investment stake into a small fortune with a diversified portfolio of bonds, real estate funds, and stock funds that owned a broad selection of blue-chip companies. But he was restless. At cocktail parties he kept running into people boasting about this Internet stock that tripled or that telecom chipmaker that doubled. He wanted some of the action. Along came a stock called Boo.com, an Internet retailer that planned to sell with no discounts “urban chic clothing—that was so cool it wasn’t even cool yet.”

Moreover, buying and selling, to the extent that it is profitable at all, tends to generate capital gains, which are subject to tax. By following any technical strategy, you are likely to realize short-term capital gains and pay larger taxes (as well as paying them sooner) than you would under a buy-and-hold strategy. Thus, simply buying and holding a diversified portfolio suited to your objectives will enable you to save on investment expense, brokerage charges, and taxes. *Edward O. Thorp actually did find a method to win at blackjack. Thorp wrote it all up in Beat the Dealer. Since then, casinos switched to the use of several decks of cards to make it more difficult for card counters and, as a last resort, they banished the counters from the gaming tables.


pages: 232 words: 70,835

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

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

Maybe emerging markets continue to grow and develop their markets at a rapid rate and they're the big winners in the coming years. The best allocation will always be the one you're most comfortable with, which allows you to stick with it over time. It's going to be impossible for a diversified portfolio to completely sidestep the pain when we experience periods like the great financial crisis from 2007 to 2009. Diversification isn't about the short term. It's about the long term. It requires patience, because building a diversified portfolio means that there are going to be times that pieces of your portfolio are going to drive you mad. Always remember that it's the performance of your entire portfolio that matters, not the individual parts.

Their performance has been much worse than the precious metals stocks. From 1991 to 2014, a diversified index of commodities only slightly outpaced the return of cash (Treasury bills), but with much higher risk.12 Unless we see a return to the highly inflationary decade of the 1970s, it's unlikely that commodities deserve a place in a diversified portfolio. Only those who can handle bone-crushing volatility and returns that are less than the stock market should apply. Generally, commodities are better suited as vehicles for short-term traders, not long-term investors. Myth 12: Housing Is a Good Long-Term Investment From 1930 to 2013, according to the Case–Shiller Index, housing in the United States returned 3.8 percent per year, just over the 3.5 percent rate of inflation in that time.

Because there were so many different factors included in these portfolios, less than one in five said that they were confident of the various risk factor exposures included across the fund. So many different risk factors were in these portfolios that they ended up offsetting one another, leaving the funds with a neutral or market risk profile. All that work to put together a widely diversified portfolio and they still ended up looking like the overall market, but at a much higher cost. This is what we call overdiversification and all it does is bring unnecessary complexity and costs to a portfolio.9 The art of doing nothing most of the time doesn't mean you can simply set your portfolio and forget it.


All About Asset Allocation, Second Edition by Richard Ferri

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

Which one best describes you today? ● ● Plan A. Buy investments that I expect will perform well over the next few years. If an investment performs poorly or the prospects change, switch to another investment or go to cash and wait for a better opportunity. Plan B. Buy and hold different types of investments in a diversified portfolio regardless of their near-term prospects. If an investment performs poorly, buy more of that investment to put my portfolio back in balance. If you are like most investors, Plan A looks familiar. People tend to put their money into investments that they believe will lead to profitable results in the near term and sell those that do not perform.

Sectors can be of different types. Stocks can be divided by industry sectors, such as industrial stocks, technology stocks, bank stocks, and so on; or they can be geographically divided, such as Pacific Rim and European stocks. Bonds can be divided by issuer, such as mortgages, corporate bonds, and Treasury bonds. A well-diversified portfolio may hold several asset classes, categories, styles, and sectors. Successful investors study all asset classes and their various components in order to understand the differences among them. They estimate the long-term expectations of risk and return, and they study how the returns on one asset class may move in relation to other classes.

No investor who had money in a diversified stock portfolio for the entire year in 1987 lost money, but that is not what people remember. We only remember how bad it felt to lose money on Black Monday. Everyone wants to earn a fair return on his or her investments after inflation and taxes. This will require risk and probably losing money on occasion. All the broadly diversified portfolios introduced in this book have inherent risk and will go down in value periodically. It would be nice to know when these losses will occur so that we can sell beforehand, but that is simply not possible. No one can predict with any consistency when the markets will go up or down. If a person tells you she has found the secret to the markets, she is either naive or she is trying to steal your money.


pages: 297 words: 91,141

Market Sense and Nonsense by Jack D. Schwager

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

An investor would be better off allocating to multiple investments, each with the same expected average return, than to just one of those investments, not only because of lower risk (the well-understood rationale) but also because the lower volatility of the diversified portfolio will yield a higher compounded return. In fact, a diversified portfolio will often yield a higher compounded return than at least some of its components with returns above the portfolio average. The implication is that unless you are confident that you can pick a significantly above-average investment, you are better off with a diversified portfolio, even for return reasons alone, not to mention the risk-reduction benefits. The impact of volatility on compounding is one of the reasons why in Chapter 3 the past best-performing sector or fund yielded a lower cumulative return than the average (in addition to having much higher risk).

Thus such pro forma results will be highly biased because, although the portfolio results are constructed from actual return data for the underlying funds, the composition of the portfolio itself is hypothetical. Another example of misleading pro forma numbers would be a manager who after trading a diversified portfolio decides to create a new specialized program that trades only one sector in the portfolio. One can safely assume that such a carve-out portfolio will be based on a market sector subset of the whole portfolio that has done particularly well. Once again, the pro forma results are based on actual returns, a factor that seems to lend credibility.

Even if individual hedge funds, on average, had the same return/risk characteristics as mutual funds or equity indexes, it would still be possible to create a portfolio with significantly better return/risk characteristics by utilizing hedge funds because of their heterogeneous nature. The fact that there are so many different types of hedge fund strategies, some with moderate to low correlation with each other, makes it possible to create a portfolio that has much greater diversification and hence lower risk. Consequently, a diversified portfolio of hedge funds has an intrinsic important advantage over traditional mutual fund investments simply because there are so many more tools to work with. Advantages of Incorporating Hedge Funds in a Portfolio There are two key reasons why a hedge fund allocation should be added to traditional long-only investment portfolios: 1.


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

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

M = minimum-risk portfolio. 15.6 illustrates, an index of managed futures returns is most strongly related to investment strategies focused on currencies, interest rates, and stocks. Commodities are in fourth place. One way of demonstrating that a commodity investment strategy is of benefit to a diversified portfolio of CTAs is to calculate how the Sharpe ratio (excess return divided by standard deviation) would change once the new investment is added to the portfolio. Table 15.7 shows how the addition of a particular commodity manager to three diversified portfolios increases the Sharpe ratio of each portfolio. The three diversified portfolios are represented by CTA indices provided by Daniel B. Stark & Co. Figure 15.8 illustrates another way of confirming that a futures trading program would be a diversifier for an existing investment in a basket of futures traders.

However, a pair where both funds were classified as systematic trend followers had a correlation of 0.47. As expected, the discretionary funds had low correlations. Given the diversity of the funds classified as currency, the correlation patterns of risk measures are along expected lines. Diversified Portfolios Table 10.5 presents the summary statistics for the diversified portfolios; Table 10.6 presents the correlations among the portfolios. For the period of our study, 107 diversified CTAs had complete data. One interesting result in the case of diversified CTAs is that no portfolios are perfectly correlated with each other. However, a majority of portfolios had high correlations, a few had moderate correlations, and none had low correlations.

Of these 5 were discretionary, 21 were systematic, 10 were trend based, and 3 were trend identifiers. Clearly the systematic or trend-based funds dominated the portfolios. The return patterns of these portfolios suggest that they have similar risk characteristics. The Interdependence of Managed Futures Risk Measures TABLE 10.5 Summary Statistics for Diversified Portfolios 213 214 TABLE 10.6 Correlations for Diversified Portfolios The Interdependence of Managed Futures Risk Measures TABLE 10.7 Summary Statistics for Financial Portfolios 215 216 TABLE 10.8 Correlations for Financial Portfolios The Interdependence of Managed Futures Risk Measures TABLE 10.9 Summary Statistics for Stock Portfolios 217 218 TABLE 10.10 Correlations for Stock Portfolios The Interdependence of Managed Futures Risk Measures 219 Stock Portfolios Table 10.9 presents the summary characteristics of the stock portfolios; Table 10.10 presents the correlations.


pages: 490 words: 117,629

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

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

SECURITY SELECTION Security selection plays a minor role in investment returns, because investors tend to hold broadly diversified portfolios that correlate reasonably strongly with the overall market. The high degree of association between investor security holdings and the market reduces the importance of security-specific influences, causing portfolio returns to mirror market returns. Consider the security selection alternative to the generally sensible investor behavior of holding broadly diversified portfolios. If an investor were to hold a single stock instead of a diverse portfolio of stocks, the idiosyncratic character of that particular security would drive equity portfolio performance.

As I gathered information for my new book, the data clearly pointed to the failure of active management by profit-seeking mutual-fund managers to produce satisfactory results for individual investors. Following the evidence, I concluded that individuals fare best by constructing equity-oriented, broadly diversified portfolios without the active management component. Instead of pursuing ephemeral promises of market-beating strategies, individuals benefit from adopting the ironclad reality of market-mimicking portfolios managed by not-for-profit investment organizations. The colossal failure of the mutual-fund industry carries serious implications for society, particularly regarding retirement security for American workers.

The investment management world includes a very small number of not-for-profit money management firms, allowing investors the opportunity to invest with organizations devoted exclusively to fulfilling fiduciary obligations. Moreover, the market contains a number of attractively structured, passively managed investment alternatives, affording investors the opportunity to create equity-oriented, broadly diversified portfolios. In spite of the massive failure of the mutual-fund industry, investors willing to take an unconventional approach to portfolio management enjoy the opportunity to achieve financial success. David Swensen New Haven, Connecticut March 2005 OVERVIEW 1 Sources of Return Capital markets provide three tools for investors to employ in generating investment returns: asset allocation, market timing, and security selection.


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

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

Investors can eliminate specific risk by holding a well-diversified portfolio, but they cannot eliminate market risk. All the risk of a fully diversified portfolio is market risk. A stock’s contribution to the risk of a fully diversified portfolio depends on its sensitivity to market changes. This sensitivity is generally known as beta. A security with a beta of 1.0 has average market risk—a well-diversified portfolio of such securities has the same standard deviation as the market index. A security with a beta of .5 has below-average market risk—a well-diversified portfolio of these securities tends to move half as far as the market moves and has half the market’s standard deviation.

Portfolio risk To calculate the variance of a three-stock portfolio, you need to add nine boxes: Use the same symbols that we used in this chapter; for example, x1 = proportion invested in stock 1 and σ12 = covariance between stocks 1 and 2. Now complete the nine boxes. 7. Portfolio risk Suppose the standard deviation of the market return is 20%. a. What is the standard deviation of returns on a well-diversified portfolio with a beta of 1.3? b. What is the standard deviation of returns on a well-diversified portfolio with a beta of 0? c. A well-diversified portfolio has a standard deviation of 15%. What is its beta? d. A poorly diversified portfolio has a standard deviation of 20%. What can you say about its beta? 8. Portfolio beta A portfolio contains equal investments in 10 stocks. Five have a beta of 1.2; the remainder have a beta of 1.4.

If the standard deviation of the market were 20% (roughly its average for 1900–2011), then the portfolio standard deviation would also be 20%. This is shown by the green line in Figure 7.15. FIGURE 7.15 The green line shows that a well diversified portfolio of randomly selected stocks ends up with β = 1 and a standard deviation equal to the market’s—in this case 20%. The upper red line shows that a well diversified portfolio with β = 1.5 has a standard deviation of about 30%—1.5 times that of the market. The lower brown line shows that a well-diversified portfolio with β = .5 has a standard deviation of about 10%—half that of the market. But suppose we constructed the portfolio from a large group of stocks with an average beta of 1.5.


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

Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, currency risk, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, Glass-Steagall Act, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Minsky moment, Money creation, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, uptick rule, Vanguard fund

This is not because the conclusions of the earlier editions needed to be changed. Indeed the rise of U.S. equity markets to new all-time highs in 2013 only reinforces the central tenet of this book: that stocks are indeed the best long-term investment for those who learn to weather their short-term volatility. In fact, the long-term real return on a diversified portfolio of common stocks has remained virtually identical to the 6.7 percent reported in the first edition of Stocks for the Long Run, which examined returns through 1992. CONFRONTING THE FINANCIAL CRISIS Because of the severe impact of the crisis, I felt that what transpired over the last several years had to be addressed front and center in this edition.

Economists use this scale to depict long-term data since the same vertical distance anywhere on the chart represents the same percentage change. On a logarithmic scale the slope of a trendline represents a constant after-inflation rate of return. The compound annual real returns for these asset classes are also listed in the figure. Over the 210 years I have examined stock returns, the real return on a broadly diversified portfolio of stocks has averaged 6.6 percent per year. This means that, on average, a diversified stock portfolio, such as an index fund, has nearly doubled in purchasing power every decade over the past two centuries. The real return on fixed-income investments has averaged far less; on long-term government bonds the average real return has been 3.6 percent per year and on short-term bonds only 2.7 percent per year.

In the first half of the twentieth century, the great U.S. economist Irving Fisher, a professor at Yale University and an extremely successful investor, believed that stocks were superior to bonds during inflationary times but that common shares would likely underperform bonds during periods of deflation, a view that became the conventional wisdom during that time.7 Edgar Lawrence Smith, a financial analyst and investment manager of the 1920s, researched historical stock prices and demolished this conventional wisdom. Smith was the first to demonstrate that accumulations in a diversified portfolio of common stocks outperformed bonds not only when commodity prices were rising but also when prices were falling. Smith published his studies in 1925 in a book entitled Common Stocks as Long-Term Investments. In the introduction he stated: These studies are a record of a failure—the failure of facts to sustain a preconceived theory, . . .


pages: 542 words: 145,022

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

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

This state of affairs changed permanently in 1952. 2 Harry Markowitz and Portfolio Selection THE COMMON PHRASE “don’t put all your eggs in one basket” is thought to have originated in the seventeenth century, but the notion of diversification dates back at least to the works of William Shakespeare and can even be found in the Bible. While it’s commonplace now to think of creating a diversified portfolio rather than investing in a collection of securities that each on their own look promising, that wasn’t always the case. It was Harry Markowitz who provided a theory and a process to the notion of diversification. He helped to create the industry of portfolio management. Before his seminal “Portfolio Selection” article in 1952, Markowitz recalled, there was no “notion that you should have a theory about what makes a well-diversified portfolio and what is the trade-off between risk and return. It’s surprising that the human race went so long to leave me to discover that.”1 In the search for the Perfect Portfolio, investors everywhere should applaud his discovery.

It turned out that in Sharpe’s CAPM world, investors would be rewarded for bearing risk but only for risk that couldn’t be diversified away—the reason why all investors held a diversified portfolio. In Sharpe’s model, the price one paid for a particular stock didn’t depend on how volatile that stock’s return was expected to be in isolation. All that mattered was the relative riskiness of that stock as part of a broad and diversified portfolio. Given these assumptions, Sharpe was able to derive a linear relationship between a stock’s expected return and its riskiness, what is now referred to as the security market line.

The equation for the security market line is also the now-famous CAPM equation: E(R) = Rf + β × (Rm − Rf), where E(R) is a stock’s expected return, Rf is the risk-free rate of return, β is a stock’s riskiness relative to the overall market, and (Rm − Rf) is the expected return on the market in excess of the risk-free rate of return, also known as the market risk premium, or MRP.29 FIGURE 3.4: The security market line compares a stock’s expected return with its risk as measured by beta (β). According to the CAPM, all stocks (held in a diversified portfolio) should fall along the security market line. Although at first glance simple, on further examination this model has a deep sense of both beauty and complexity. It shows why some securities have higher returns than others but only as compensation for risk. As long as an investor holds a diversified portfolio, the only measure of risk that matters is beta, the covariance of a security’s return with the market portfolio. Nothing else matters.


pages: 244 words: 58,247

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

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

Most investors are already familiar with them. As you may know, they offer several important advantages:1. Diversification. The risk of owning a whole portfolio of stocks is considerably less than the risk of holding any one of the individual stocks in it. But it can take quite a bit of money to build a diversified portfolio of stocks or bonds. You get instant diversification with each mutual-fund share. 2. Professional management. Whether you own an index fund or an actively managed fund, there is a professional manager overseeing the portfolio. 3. Low minimums. Each fund establishes its own investment minimum.

These results—which have been confirmed by many other studies—are startling. It means that over the long term, your chosen asset allocation is 10 times as important as security selection and market timing combined. HIGHER RETURNS WITH LESS VOLATILITY The goal of asset allocation is to create a diversified portfolio with the highest possible return within an acceptable level of risk. You achieve this by combining noncorrelated assets, like stocks, bonds, and real estate investment trusts (REITs). Academics call it building an efficient portfolio. When I talk to investors about asset allocation, they are often dismissive.

High-yield bonds, also called non- investment-grade bonds, are also corporate bonds. These are bonds rated BBB- or lower by the rating agency Standard & Poor’s. They are issued by companies less creditworthy than those that issue investment-grade bonds and are considered speculative. But don’t let the name junk bond throw you. A diversified portfolio of these bonds, even after accounting for defaults, has returned more than either Treasuries or high-grade corporates. And while they do tend to be more highly correlated with the stock market than other bonds, they do not move in lock step with equities, giving you some diversification advantage. 3.


pages: 572 words: 94,002

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

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

No active funds lurk in this portfolio, so no inefficient humans dabbling with your hard-earned money. The funds offer a simple, globally diversified portfolio, with a weighting to the home (UK) market, in line with Vanguard’s approach[384]. From a UK investor’s perspective, a diversified global portfolio is the way to go if you want to guard against underperformance of a particular index, maximise returns and minimise risk[385]. The asset allocation (before you reach FIRE) is 100% equities for reasons already covered. If you piece together a globally diversified portfolio of funds, it will cost you slightly less than, for instance, buying a one-world equity fund.

[385] maximise returns and minimize risk: “Does International Diversification Improve Safe Withdrawal Rates...” 4 Mar. 2014, toreset.me/385a. The article also finds that for UK investors between 1900 and 2012 a globally diversified portfolio performed better in 78.6% of the cases versus 21.4% for domestic portfolios. Nobel prize-winning economist Harry Markowitz’s modern portfolio theory was the first to show that a diversified portfolio can improve performance and decrease risk over long periods: “Modern Portfolio Theory (MPT) – Investopedia.” toreset.me/385b. [386] one-stop options: figures correct as of 7th June 2018. [387] helps with currency risk: “Currency risk – Monevator.” 4 Jul. 2013, toreset.me/387

But during that time, the Dow Jones has risen from 1,000 to its present 25,108 while the FTSE All Share Index has moved from 218.18 to its current 4,225 (gains of 2,411% and 1,836%[348]). While there are exceptions (the freak case of Japan since 1989, for instance), typically whenever stock markets have crashed, they’ve recovered. Always in the US and UK. This is why (as we’ll see later in Part IV), wherever you live in the world, you need to form an internationally diversified portfolio, keep your emotions in check and be in it for the long-term. 6. Good if it goes up, good if it goes down It’s easy looking at the long-term when times are good. But what about when you’re mired in the daily 2% hits to your life savings that are commonplace when the market gets the jitters?


pages: 236 words: 77,735

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

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

In order to gather more money under our control, the wholesaler suggested we start selling mutual funds. They were marketed as less risky because they invested in lots of stocks. But, we told him, we invested in lots of stocks too! He agreed, with a puzzled stare, but continued to extol the virtues of a diversified portfolio as defined by many funds, not many stocks. To be fair, a diversified portfolio for us was 5 to 10 stocks, which is still considered fairly focused. While we didn’t care or get it at the time, the bottom line was that his pitch was all about getting the safe money. Needless to say, we didn’t much care for what the funds did, as they all looked the same.

After looking back at the performance of both groups of stocks, the conclusion was not what some had expected: “First, dividend yield does not have a consistent impact on expected return . . . second . . . expected return on the [higher yielding] portfolio, given its level of risk, will be lower than it might be with a better diversified portfolio.” Let me put this into plain English. A stock’s performance wasn’t determined by how much a corporation paid as a dividend, if it all. Sometimes higher dividend-paying stocks performed better, and other times they did not, compared to lower-paying stocks. There was not a clear pattern you could take to the bank. Their second point is critical. Trying to put together a high-yielding portfolio would get you a similar result to the broad market, but increase your risk. Why? You simply had a smaller, less diversified portfolio that in the end would have the same performance as a more diversified portfolio.

You wouldn’t buy something if it wasn’t designed to make a profit, right? Because they don’t move together, one asset will surely be moving up while another moves down. Thus, we have a group of different assets that all go up in the long run, but their random movement allows us to sleep at night knowing we have constructed a diversified portfolio. All you need is a professional adviser that can lead you to the Promised Land by telling you how much of each asset you should have based on the level of risk appropriate. The Original Pie Crust Where did this idea of diversification come from? In 1952 an American economist named Harry Markowitz wrote an article describing “Portfolio Theory.”


pages: 403 words: 119,206

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

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

Even if they did occasionally add common stocks to the portfolios they managed, they invariably chose only the most stable, dividend-paying shares, which often had less growth potential than stocks that might be defined as speculative. It was this approach that Markowitz attacked broadside. He showed that a diversified portfolio of stocks, even one that included more “speculative” shares, could actually be no more risky than some of the “prudent” portfolios, if the stocks included in the diversified portfolio were carefully selected to minimize covariance. He even found that some portfolios of so-called safe securities could actually be quite risky because the securities had high covariances, meaning that they could move together adversely under certain circumstances.

Sharpe found that about one-third of the movement of an average stock was a reflection of the movement of the overall market, while the rest was explained by the stock’s relationship to other stocks in similar industries, or by the unique characteristics of the stock itself. Significantly, however, he found that in a properly diversified portfolio the non-market-related factors cancelled each other out, leaving the influence of the market as the primary factor affecting the value of the entire portfolio. Sharpe’s ideas were published in Management Science magazine in January 1963. In the article, Sharpe estimated that by using his approach, the mainframe computer time required to select a “Markowitz” diversified portfolio from a hypothetical universe of 100 stocks would be cut from 33 minutes to 30 seconds. It was now possible for virtually any investment manager to put together a “risk efficient” portfolio that would maximize expected return for a given level of risk.

In effect, Barron was claiming that the market was less risky in the long run than it appeared to be in the short run. An empirical basis for this important conclusion was provided by the publication in 1924 of Common Stocks as Long Term Investments by Edgar Lawrence Smith. The thesis of the book, unremarkable from today’s perspective but revolutionary in the early 1920s, was that a diversified portfolio of common stocks would consistently outperform bonds over long time horizons. Smith argued that the increasingly common practice of retaining earnings to finance future expansion created a “compounding effect” that gave the stocks of modern corporations an “upward bias.” His book caused something of a sensation, both among academics and the financial press.


pages: 407 words: 114,478

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

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

If it returns, say, 10% in a given year, does it bother you that some of the stocks in it may have lost more than 80% of their value, as will happen to a few each year? Of course not. A globally diversified portfolio behaves the same way, except that the performance of each component is now more visible to you in the form of returns data in the daily paper and your quarterly statements. As an example, I’ve listed the returns for 1998, 1999, and 2000 for some of the most commonly used stock asset classes: This three-year sequence is a pretty typical one. Let’s start with 1998. In the first place, a diversified portfolio did reasonably well in that year. U.S. large stocks did the best, but REITs lost a lot of money.

If you can live on 3.5% of your savings and you can shelter almost all of your retirement money in a Roth IRA (which does not require mandatory distributions after age 70 1/2), then you are guaranteed success for up to 30 years, which is the current maturity of the longest bond. For devout believers in the value of a well-diversified portfolio, this option is profoundly unappealing, as this is a poorly diversified portfolio—the financial equivalent of Eden’s snake. (Although it’s a very secure basket!) At a minimum, however, some commitment to TIPS in your sheltered accounts is probably not a bad idea. At the end of the day, you can never be completely certain that your retirement will be a financial success.

Another way of putting this is that rebalancing forces you to be a contrarian—someone who does the opposite of what everyone else is doing. Financial contrarians tend to be wealthier than folks who like to simply follow the crowd. This concept also reveals the major benefit of a diversified portfolio: the advantage of “making small bets with dry hands.” In poker, the player who is least concerned about the size of the pot has the advantage, because he is much less likely to lose his nerve than his opponents. If you have a properly diversified portfolio, you are in effect making many small bets, none of which should ruin you if they go bad. When the chips are down, it will not bother you too much to toss a few more coins into the pot when everyone around you is folding his hand.


pages: 335 words: 94,657

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

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

, reading a prospectus and understanding what you're investing in will be well worth the time and effort. We can't emphasize it enough: Read the fund's prospectus and understand what you re investing in! There are at least 10 advantages of investing in mutual funds: 1. Diversification. The costs involved in purchasing a diversified portfolio of individual stocks and bonds could be prohibitive for most investors. However, since each mutual fund invests in a large number of stocks, bonds, or both, you get instant diversification when you buy a mutual fund. 2. Professional management. Whether your fund is an index fund or an actively managed one, there are professional managers at the helm. 3.

Finally, because of the wide selection of funds available, you can probably find a fund to fit just about any investment needs you might have. So, as we've seen, mutual funds have a lot to offer. We feel strongly that they should be the investment of choice for most individual investors. Funds of Funds In an attempt to simply investing, a recent trend has developed that allows investors to obtain a nicely diversified portfolio by choosing a single mutual fund that meets their desired asset allocation. These offerings invest in other mutual funds, normally from the same company, and usually include stock, bond, and money market mutual funds-thus the name funds of funds. Some of these funds maintain a fairly stable ratio of stocks, bonds, and cash at all times, so it's up to investors to switch to a more conservative fund as they get older and closer to retirement.

Sharpe, Nobel Laureate, STANCO 25 Professor of Finance, Emeritus, Stanford University Graduate School of Business and Chairman, Financial Engines, Inc.: "I love index funds." Rex Sinquefield, co-chairman of Dimensional Fund Advisors: "The only consistent superior performer is the market itself, and the only way to capture that superior consistency is to invest in a properly diversified portfolio of index funds." Larry E. Swedroe, author of The Successful Investor Today: "Despite the superior returns generated by passively managed funds, financial publications are dominated by forecasts from so-called gurus and the latest hot fund managers. I believe that there is a simple explanation for the misinformation: it's just not in the interests of the Wall Street establishment or the financial press to inform investors of the failure of active managers."


pages: 537 words: 144,318

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

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

., stocks and bonds have had pretty much the same return on risk for the last 80 years, during which time they have been uncorrelated, on average. A diversified portfolio would ideally have an equal risk allocation to stocks and bonds, which would suggest an allocation of about 20-80 stocks-bonds. International diversification is also very important. Within reasonable capacity constraints, I would suggest trying to equal weight most things by risk. Once you have a diversified portfolio with stocks and bonds, your next concern should be inflation. Over the long term all assets respond to inflation. However, over the short- to medium-term many of the assets traditionally included as inflation hedges are anything but.

Soon after its publication, investors from family offices to pensions and foundations began trying to emulate Yale by creating their own endowment-style portfolios. The “Yale Model” soon came to be known as the “Endowment Model” as the portfolio management style became pervasive among university endowment portfolios. The Endowment Model, as it was popularly interpreted, is a broadly diversified portfolio, though with a heavy equity orientation, which seeks to earn a premium for taking on illiquidity risk. The argument behind the equity and “equity-like” orientation is that stocks produce the highest returns over time. This fundamental concept has roots in the very foundations of capitalism: risky equity capital should earn more than less risky bonds.

Views sometimes count very little, whereas good risk management always counts a lot. The top performers in 2008 were able to put on good risk-versus-reward bets at the right time, and had the liquidity to do so due to good risk management. The old style of risk management suggests establishing a “diversified” portfolio with different asset weightings based on risk tolerance and time profile, which does not really work in this environment. If you are 60 years old, you are theoretically supposed to increase your bond weighting. But if you did that at the beginning of 2009—decreased your equities and increased your bonds—you virtually committed suicide.


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

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

A Different Way to Diversify Given the problems with conventional beliefs about diversification discussed above, there is a better way to look at the challenge of achieving strong diversification within a portfolio. A diversified portfolio only works when the assets you own are not all moving in lockstep. A portfolio where everything is going up at the same time can also turn into a portfolio where everything is going down at the same time. A diversified portfolio only works when the assets you own are not all moving in lockstep. A portfolio where everything is going up at the same time can also turn into a portfolio where everything is going down at the same time.

Some funds also have front end loads and other fees. 4. William F. Sharpe, “The Arithmetic of Active Management,” Financial Analyst's Journal, January/February 1991: 7–9. Chapter 5 Investing Based on Economic Conditions The Illusion of Diversification The notion that investors should build diversified portfolios is based on the idea that by allocating funds among different investments no single catastrophic event can inflict too much damage on the whole portfolio. The idea itself is simple, but achieving strong diversification in a portfolio actually takes quite a bit of thought to make sure that it will really work when needed.

The point above applies to other assets as well, whether it is gold, bonds, real estate, or anything else an investor may purchase. Any one of them can go into a bad market for extended periods and stay there for years or even decades. And yes, at different points in time all of these assets have done exactly that. When it comes to investing, there are just no guarantees. A strongly diversified portfolio should not overweight any particular asset. Instead, it should assume that the future might not resemble the past and hold a balanced allocation that will position the portfolio well for whatever the future may bring. The purpose of a balanced allocation is so that when one asset unexpectedly begins performing poorly there will be other assets to take up the slack and protect against serious losses.


pages: 425 words: 122,223

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

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

If the price of a security is more volatile than the movements of the dominant factor, that security will make the portfolio more variable, and therefore more risky, than it would have been otherwise; if the price of the security is less volatile, it will make the portfolio less risky. In well-diversified portfolios, the simple average of these relationships will then serve as an estimate of the volatility of the portfolio as a whole. What is the “basic underlying factor” to which Sharpe refers? There is no doubt that individual stocks respond most directly to the stock market as a whole. About one-third of the variability of the average stock is simply a reflection of moves in the “index”—or “the most important single influence.”

I had never even set my fingers onto a computer keyboard until I attended a 1969 summer workshop at Harvard Business School. PCs with video screens were not yet a gleam in an inventor’s eye; we sat at terminals hooked into a mainframe located somewhere else and waited patiently while a clattering printer produced our results in hard copy. I now realize that we were using the computer to compose diversified portfolios, but I had little idea at the time of what that clattering was all about. ••• Only two analyses of any note had appeared during the twenty years following Cowles’s 1933 article, one in 1934 and the other long afterward in 1953. Neither paper was by an economist. The authors in each case were statisticians who used the data base of the financial markets to prove a point about statistical methods.

Profitable trading depends on imperfections, which develop only when other investors are slower than the swinger to receive information, draw erroneous conclusions from it, or delay acting on it. Gradual recognition and understanding of the facts is what makes for trends instead of bedlam. Professionals insist that they can win when they invest actively, as opposed to buying and holding a broadly diversified portfolio, because they can distinguish trends from noise and make better sense than amateurs out of new information. Moreover, because they are full-time players tuned in to all the smart brokers and analysts, professionals are confident that they can act fast enough to beat the others to the gun. Alexander contrasts this view with the view of the academics who hold that the best way to anticipate future price movements is to toss a coin.


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

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

Similarly, for the 30-year and 40-year periods, using The 95% Rule generated a 2% to 5% drop-off in success rates. For the target of 4.3% withdrawal level, assume that success rates would fall by a few percent in about half the cases going forward, a modest drop in security for the much-needed additional income during poor market conditions. Diversified portfolios survive best A simple portfolio of stocks and bonds will not survive nearly as well as a diversified portfolio with small and value tilts and international stocks. To see the impact of the portfolio composition on success rates, compare the columns in the chart above. The first is the success rate data already seen above for the standard withdrawals from the Rational Investing portfolio (labeled RIP).

Unless you have a sizable pension, these assets will become a major focus as you plan and work to save enough to safely semi-retire. By projecting a reasonable rate of growth, you can see how the combination of fresh annual savings and portfolio earnings can work together to bring you to your goal. A reasonable assumption would be that the earnings in a diversified portfolio would grow by 8% a year, or 5% per year in real terms—that is, after subtracting 3% average inflation. While you have little control over how your assets perform, 2004 13,000 9,000 181,342 65,637 315,709 229,408 792,096 12,000 8,000 164,135 62,512 294,485 212,294 733,425 12,000 8,000 148,700 59,535 274,748 196,470 679,453 10,000 8,000 134,000 56,700 255,950 181,400 628,050 8,000 TOTAL SAVINGS 79,000 98,000 120,000 54,000 239,000 168,000 581,000 8,000 52,000 6,000 47,000 207,000 229,000 147,000 161,000 480,000 540,000 6,000 55,000 39,000 151,000 104,000 349,000 6,000 48,000 46,000 164,000 112,000 370,000 6,000 35,000 48,000 187,000 124,000 394,000 IRA/401(k) Contributions This Year Regular IRA/401(k) Roth IRAs Taxable Accounts A Taxable Accounts B Sum of Taxable and Tax-Advantaged Financial Assets 2009 Projected 10,000 2008 Projected 8,000 2007 2006 Projected Projected 8,000 2005 Taxable Savings This Year ANNUAL SAVINGS 2003 7,000 2002 7,000 2001 7,000 2000 Total Savings Worksheet chapter 2 | Live Below Your Means | 99 100 | Work Less, Live More you do have control over your annual savings—and you should commit yourself to make them as large as reasonably possible.

You can find data on each of your fund’s fees and expenses in its prospectus or by entering the ticker symbol at www. morningstar.com. The Rational Investing portfolio has average annual fees and expenses of about .35%, though internal fund trading costs and brokerage expenses might push that closer to .5%. For investment mix detail, choose the second option, and enter a diversified portfolio that uses FireCalc’s available historical data to approximate the Rational Investing portfolio introduced in Chapter 3: U.S. MicroCap 11%, U.S. Small 10%, U.S. Small Value 9%, S&P 500 11%, U.S. Large Value 9%, U.S. Long Term Treasury 18%, Long-Term Corporate Bond 30%, 1-month Treasury 2%. Overall, this portfolio will be invested 50% in stocks and 50% in bonds.


pages: 248 words: 57,419

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan

Alan Greenspan, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, Ben Bernanke: helicopter money, Bretton Woods, business cycle, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, Glass-Steagall Act, income inequality, inflation targeting, It's morning again in America, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, low interest rates, market bubble, market fundamentalism, mass immigration, megaproject, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, Nixon triggered the end of the Bretton Woods system, private sector deleveraging, quantitative easing, reserve currency, risk free rate, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

Balance of payments: asset prices and currencies and foreign central banks’ creation of fiat money and foreign exchange reserves global imbalances government finance and quantitative easing and U.S. and foreign exchange reserves Banking sector: commercial banks, credit creation, and decline in liquidity reserves commercial banks’ credit structure current financial health of in Mitchell’s theory of business cycles New Great Depression scenarios and Bank of America Baruch, Bernard Bear Stearns Bernanke, Ben: global savings glut theory of on Milton Friedman policy responses to credit expansion and New Depression Bodin, Jean Bonds: in diversified portfolio effect of stimulus on quantitative easing and Bush, George W. Business cycles, theories of Business Cycles: The Problem and Its Setting (Mitchell) Capital adequacy ratio (CAR) Capitalism, evolution to credit-based, government-directed economic system China: fiat money creation and foreign exchange reserves New Great Depression scenarios and possibility of end to buying of U.S. debt Citibank Commercial banks. See Banking sector Commercial Paper Funding Facility (CPFF) Commodities: in diversified portfolio inflation and quantitative easing and regulation of derivatives market and Congressional Budget Office (CBO): budget outlook scenarios government debt estimates Construction sector, in Mitchell’s theory of business cycles Consumer price inflation Corporate sector: inflation and deflation’s effects on share of U.S. debt Corruption of Capitalism, The (Duncan) Credit creation and expansion: credit structure of U.S., 1945 and 2007 economic growth and essential to booms foreign causes transformation of U.S. economy by U.S. domestic causes “Crowding in” “Crowding out” Currencies, trade balances and Current account balances.

solar initiative example Reagan, Ronald Rental property, in diversified portfolio Republican Party Reserve requirements: asset-based securities and government-sponsored entities and commercial banks and current Roosevelt, Franklin D. Rothbard, Murray Russia Saving and investment, in Mitchell’s theory of business cycles Savings and loan companies, credit supply and Schumpeter, Joseph Schwartz, Anna Jacobson Solar initiative, proposed Spain Special Drawing Rights (SDRs) Special purpose vehicles (SPVs), credit creation and Status quo option, for U.S. Stocks: in diversified portfolio quantitative easing and Switzerland Taiwan Tariffs: inflation and New Great Depression scenarios and Tax revenues: credit expansion’s effect on during Great Depression New Great Depression consequences and Theory of Money and Credit, The (von Mises) Time deposits, commercial bank funding and Total credit market debt (TCMD): contraction of by economic sector foreign central banks’ creation of fiat money and foreign exchange reserves in 2011 likely for 2012 major categories of sectors and changing percentages of debt Trade, generally.

Those unable to devote all their time and energy to deciphering the kaleidoscopic changes in the politics and policies of Washington have the option of constructing a broadly diversified investment portfolio that would ensure significant wealth preservation regardless of whether the price level moves up or down. The following are five components of a diversified portfolio: 1. Commodities generally perform well in an inflationary environment and suffer in times of disinflation or deflation. Gold and silver benefit most from quantitative easing, which undermines public confidence in the national currency. 2. Stocks tend to rise (1) in a healthy economic environment, (2) when central banks create money and pump it into the financial markets (so long as they don’t cause too much inflation), (3) when the government runs a budget surplus and crowds in the private sector, and (4) when the trade deficit is larger than the budget deficit.


pages: 345 words: 87,745

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

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

One use for the model is to compare a mutual fund performance to three distinct risks factors and isolate how much of a fund’s return was due to these three factors and how much was due to the fund manager. Fama and French found that, on average, beta alone explained about 70 percent of a diversified portfolio’s performance. When they measured how much exposure that randomly created portfolios were influenced by the three risk factors of beta, size, and BtM, they could explain within about 95 percent accuracy how a diversified portfolio should have performed in relation to the stock market without knowing the actual return of the portfolio. All they needed to know was the amount in each risk factor. The results were a blow to active portfolio managers, who until this time touted their stock-picking prowess as the primary reason for generating alpha.

Index Funds Make Most Active Funds Obsolete It wasn’t necessary for actively managed mutual funds to beat the market prior to the introduction of index funds because they were the only game in town. They were the only option available. Mutual fund companies fulfilled their obligation to investors by offering a broadly diversified portfolio of securities that individuals could not replicate on their own at the same cost. In this regard, actively managed funds were a good deal for investors. But that era has passed. Today, actively managed funds aren’t needed to gain broad diversification in an asset class. Index funds and ETFs perform that function much more efficiently.

For the small investor to make an intelligent selection from these—indeed, to pass an intelligent judgment on a single one—is ordinarily impossible. He lacks the ability, the facilities, the training, and the time essential to a proper investigation.3 The mutual fund system worked for the industry and for investors for many years because it was a win-win situation. Investors bought into a diversified portfolio of securities through mutual funds, and the fund companies didn’t need to be concerned about losing assets when their managers underperformed the markets because few people monitored the returns that closely. Passive Investing Makes Its Case The cozy relationship between Wall Street and Main Street lasted for several decades.


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

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

You have the rest of your life to get your affairs in order; the time you take learning and planning will be time well-spent. 2. Acquire an appreciation of the nature of and fundamental relationship between risk and reward in the financial markets. 3. Learn about the risk/reward characteristics of various specific investment types. 4. Appreciate that diversified portfolios behave very differently than the individual assets in them, in much the same way that a cake tastes different from shortening, flour, butter, and sugar. This is called portfolio theory and is critical to your future success. 5. Estimate how much risk you can tolerate; then learn how to use portfolio theory to construct a portfolio tailored to produce the most return for that amount of risk. 6.

Dealing with More Than Two Imperfectly Correlated Assets The above models have been quite useful for demonstrating the effect of diversification on risk and return of two similar assets (Example 2) and two different assets (Example 1) with zero correlation. Unfortunately, the above examples are no more than useful illustrations of the theoretical benefits of diversified portfolios. In the real world of investing, we must deal with mixes of dozens of asset types, each with a different return and risk. Even worse, the returns of these assets are only rarely completely uncorrelated. Worse still, the risks, returns, and correlations of these assets fluctuate considerably over time.

We can’t predict returns, SDs, and correlations accurately enough. If we could, we wouldn’t need the optimizer in the first place. And optimizing raw historical returns is a one-way ticket to the poor house. So, forget about getting the answer from a magic black box. We’ll have to look elsewhere for a coherent allocation strategy. More Bad News A well-diversified portfolio is not a free lunch. It does not come anywhere near eliminating risk; economic catastrophes do not respect national borders. The events of 1929–1932 and 1973–1974 involved all markets, and the damage varied only in degree among national markets. Markowitz mean-variance analysis tells us that if one asset has an SD of 20%, then two completely uncorrelated assets 72 The Intelligent Asset Allocator (zero correlation) will have an SD of 14.1%, and four mutually uncorrelated assets, an SD of 10%.


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

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

The superior performance of U.S. equities over the past two centuries is not a special case. Stocks have outperformed fixed-income assets in every country examined and often by an overwhelming margin. International studies have reinforced, not diminished, the case for equities. CONCLUSION: STOCKS FOR THE LONG RUN Over the past 200 years the compound annual real return on a diversified portfolio of common stock is nearly 7 percent in the United States, and it has displayed a remarkable constancy over time. The reasons for the persistence and long-term stability of stock returns are not well understood. Certainly the returns on stocks are dependent on the quantity and quality of capital, productivity, and the return to risk taking.

CHAPTER 2 Risk, Return, and Portfolio Allocation FIGURE 25 2–1 Maximum and Minimum Real Holding Period Returns, 1802 through December 2006 It is very significant that stocks, in contrast to bonds or bills, have never delivered to investors a negative real return over periods of 17 years or more. Although it might appear to be riskier to accumulate wealth in stocks rather than in bonds over long periods of time, precisely the opposite is true: the safest long-term investment for the preservation of purchasing power has clearly been a diversified portfolio of equities. Some investors question whether holding periods of 10 or 20 or more years are relevant to their planning horizon. But one of the greatest mistakes that investors make is to underestimate their holding period. This is because many investors think about the holding periods of a particular stock, bond, or mutual fund.

As noted in the last chapter, the last 30-year period in which bonds beat stocks ended in 1861, at the onset of the U.S. Civil War. This is a point worth remembering: never in any of the past 175 years would a buyer of newly issued 30-year government bonds (had they been issued on an annual basis) have outperformed an investor in a diversified portfolio of common stocks held over the same period. Although the dominance of stocks over bonds is readily apparent in the long run, it is also important to note that over one- and even twoyear periods, stocks outperform bonds or bills only about three out of every five years. This means that nearly two out of every five years a CHAPTER 2 Risk, Return, and Portfolio Allocation 27 stockholder’s return will fall behind the return he or she would get on Treasury bills or bank certificates.


pages: 300 words: 77,787

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

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

It is a major evolution in the investing world that products tracking these indices are now readily available: just 15 years ago they were not. Some books on investing involve intricate arguments about why certain geographical areas or sectors of the equity markets will outperform and provide a safe haven for the investor. On the contrary, the most diversified portfolio you can find offers the greatest protection against regional declines. Also, since we are simply saying ‘buy the world’, the product is very simple and should be super cheap. Over the long run that will matter greatly. Someone willing to add a bit of complexity to the very simple portfolio of world equities and minimal-risk government bonds could add other government and corporate bonds (see Figure 3.2).

You may have a diversified rational portfolio with your investments, but you are still taking a large concentration risk in your overall economic life. If the UK property market went down the drain you would be in a rough spot, despite having done the right things in your investment portfolio. It could well be that the diversification benefits you gained from having a broadly diversified portfolio were dwarfed by the fact that the rest of your assets were so concentrated. You might be losing your job and any potential future job prospects, your house may decline in value and your inheritance be worth less, all for the same reason. As unpleasant as the plight of the UK investor would be in the above scenario, compare it to the situation of an investment portfolio composed exclusively of UK property stocks.

But in a case like that you can take solace from the fact that while this hurts you locally your rational portfolio is broadly diversified and perhaps not declining at the same time as everything else in your life is going wrong. There is no generalised way to reduce the concentration risk outlined above. If you find yourself with too great a concentration risk try to find ways to divest some of the assets that add to this risk and re-invest those in a more diversified portfolio like the rational one. Unfortunately many people only worry about these issues after misfortune has hit. Not just geography I had a friend who was a successful internet entrepreneur. He had made some money from selling his internet business and was now launching the next one. Because of the risk he perceived in his own business he did not invest too much of his money into the new venture.


pages: 250 words: 77,544

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

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

But this technique really shines when you earn higher returns, like the 7% from a diversified portfolio, and give your portfolio time to mature. The graph below shows how a $10,000 nest egg grows when you put your money in diversified investments, bonds, money market funds, and savings accounts. Compare the line for inflation to see how investing can help you beat the steady rise in prices. You can see below how investments start to take off after 15 years. That’s compounding at work, and that’s why it’s important to start investing for long-term goals as early as you can. $160,000 $140,000 Diversified portfolio $120,000 Bonds Inflation Dollars $100,000 Money Market $80,000 Savings $60,000 $40,000 $20,000 $0 0 5 10 15 25 20 Years 30 35 40 Investing for the Long Term Although well-diversified investing works like magic when you give it time, it doesn’t make sense for short-term goals.

The returns from savings accounts, certificates of deposit, and other savings options rarely beat inflation, so you simply can’t save enough to pay for everything you need or want. What can you do? Fight back by investing your money instead of stashing it in your mattress. When you invest your money, your savings work harder. The return on a diversified portfolio of stocks and bonds averages about 7%. That not only beats inflation, it shoots growth hormones (all organic) into your nest egg. Invest that $10,000 savings per year and earn 7%, and you’ll have almost a million dollars after 30 years, instead of $300,000. Still not as much as you need, but you’ll learn how to make ends meet by the time you finish reading this book.

During recessions, the stock market can really tank, like the almost 50% drop it suffered in 2001. You wouldn’t want to see half your nest egg go away the year before you retire. However, since 1929, the average annual return on stocks is more than 10% despite battering from the Great Depression and several recessions. Why Should You Invest? 19 Besides, a diversified portfolio isn’t invested solely in the stock market, as you’ll learn in Chapter 9. By investing in stocks, bonds, and real estate, you won’t see drops as big as the ones for stocks alone. Chapters 9, 10, and 11 also tell you how to move money that you need in the next few years into ultra-safe savings so it’s around when you need it.


pages: 353 words: 148,895

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

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

Investment is as much about risk as return, so in sections 4.5 to 4.7 we turn our attention to risk. In section 4.5, we examine the distribution of annual real asset returns for the United States from 1900–2000, and document the risk of US equities, bonds, and bills. Our figures for equity risk are based exclusively on market indexes that represent highly diversified portfolios. Section 4.6 shows that individual stocks tend to be much riskier than this, and demonstrates the importance and power of diversification for equity investors. Finally, in section 4.7 we present risk comparisons both across asset classes and countries. We show that over the long haul, risk and return have gone hand-in-hand.

For our purposes— emphasizing comparisons between assets and countries—greater precision is not needed. 4.6 Risk, diversification, and market risk The risk figure cited in the previous section, namely, a standard deviation of 20.2 percent, was for real returns on the overall US market. This would be the risk level experienced by an investor who purchased a US index fund, or who held a very well diversified portfolio of US stocks. Individual stocks will typically have standard deviations much higher than this. The lower risk for the overall market is attributable to the power of diversification. 57 Chapter 4 International capital market history Most finance textbooks have a diagram showing how rapidly diversification reduces the risk of an equity portfolio because the returns on different stocks are less than perfectly correlated.

Figure 4-11 shows how quickly risk is reduced as the number of (randomly chosen) stocks rises from one to fifty, when equal amounts are invested in each. The vertical axis shows the “excess standard deviation,” which is the difference between the portfolio’s risk and the risk of investing in an equally weighted index of all stocks. “Excess standard deviation” thus measures diversifiable risk, which is zero for a fully diversified portfolio. Diversifiable risk clearly falls off rapidly. Many textbooks state that most of the benefits are achieved with just twenty stocks. This is potentially misleading as a twenty-stock portfolio still has an appreciable level of diversifiable risk, and also because Campbell, Lettau, Malkiel, and Xu found that the number of stocks needed to achieve a given level of diversification has increased in recent years.


pages: 89 words: 29,198

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

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

Since it’s so difficult to find even a few companies that can be both accurately valued and available at a good price, one thing seems pretty clear: once a fund gets to its twentieth or fiftieth favorite pick, it’s not likely that very much extra value is being added to the portfolio. But there are a number of reasons why most funds still own so many stocks. First, they view having a diversified portfolio of many stocks as an advantage. It’s difficult for individual investors to purchase and keep track of a portfolio of fifty to two hundred stocks. A mutual fund with a professionally managed, widely diversified portfolio provides a service that most individuals have difficulty replicating on their own. This diversification helps make sure that a handful of bad stock choices don’t have an outsized negative influence on overall investment returns.

Over the long term, managing a concentrated portfolio may be a great way to beat the market averages, but over shorter time horizons it’s also a great way to risk your business and your career. As a result, only a few brave souls choose this route in the mutual fund world. It’s just much safer for most managers to buy a widely diversified portfolio of many stocks that are more likely to closely mirror the major market averages and much less likely to fall significantly behind. As you might suspect, special situation investing follows pretty much the same story line. By definition, each of these special situations, in which a company is going through some sort of extraordinary change, is unique.

In general, our emotions tell us to shy away from these. On the other hand, everyone already knows the bad news, and on average we don’t have to pay a lot for our purchases. In fact, on average, people overreact and we get to own a portfolio filled with bargains! The important thing is that we do this systematically. By buying a diversified portfolio based on just the numbers, not emotions, we’ve taken our first step. But here’s the big problem. While our value strategy makes sense and seems to work over long periods of time, unfortunately, it doesn’t always work. In Chapter 6 we learned that if you follow a strategy that differs from market-cap-weighted indexes like the S&P 500 or the Russell 1000, there can be long periods of underperformance.


pages: 356 words: 51,419

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

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

I wouldn’t dream of consuming valuable pages in this small book with a weighty bibliography, so please don’t hesitate to visit my website. Notes 1 Keep in mind that an index may also be constructed around the bond market, or even “road less traveled” asset classes such as commodities or real estate. Today, if you wish, you could literally hold all your wealth in a diversified portfolio of low-cost traditional index funds representing every asset class and every market sector within the United States or around the globe. 2 Over the past century, the average nominal return on U.S. stocks was 10.1 percent per year. In real terms (after 3.4 percent inflation) the real annual return was 6.7 percent.

But buoyed by abundant self-confidence, these folks aren’t about to give up on actively managed funds themselves. A tad delusional? I think so. Picking the best-performing funds is ‘like trying to predict the dice before you roll them down the craps table,’ says an investment adviser in Boca Raton, FL. ‘I can’t do it. The public can’t do it.’ “To build a well-diversified portfolio, you might stash 70 percent of your stock portfolio into a [total stock market] index fund and the remaining 30 percent in an international-index fund.” If these comments by a great money manager, a brilliant academic, and a straight-thinking journalist don’t persuade you about the hazards of focusing on past returns of mutual funds, just believe what fund organizations tell you.

You’ll note that the fundamental index fund earned higher returns while assuming higher risk than the S&P 500 fund. The dividend index, on the other hand, earned lower returns and carried lower risk. But when we calculate the risk-adjusted Sharpe ratio, the S&P 500 Index fund wins in both comparisons. The similarity of returns and risks in all three funds should not be surprising. Each holds a diversified portfolio with similar stocks—simply weighted differently. In fact, given the remarkably high correlation of 0.97 of both smart beta ETFs with the returns earned by the S&P 500, both could easily be classified as high-priced “closet index funds.” What the S&P 500 index portfolio offers is the certainty that its investors will earn nearly the entire return of the stock market index.


pages: 483 words: 141,836

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

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

Since this particular stock has the highest expected return, that means you’re going to average in lower expected return investments. Your portfolio expected return is the weighted average of your individual stock expected returns, so a diversified portfolio has to have a lower expected return than the 100 percent you can get with this one stock. But a diversified portfolio can have much lower risk than even the safest component. By spreading your money around, you might end up with a portfolio expected return of 10 percent, instead of the 100 percent you can get with one stock, but with much less probability of losing money.

You could, of course, put half your portfolio in bonds and the other half in diversified risky assets, but this still makes you a risk taker, seeking out as many risks as possible. You just run a low risk version of the strategy. There’s nothing that says a risk taker has to have a high-risk life. In practice, however, once investors take all the trouble to create a broadly diversified portfolio, or individuals learn to embrace risk, they tend to exploit the investment. It’s good that people make this choice young, because each route requires skills and life attitudes that would be fatal to acquire playing for adult stakes. Risk takers must enjoy the volatility of the ride, because that’s all there is.

Another very important point is that the average return on the individual investments is 32.9 percent, only a little less than the 35.5 percent from the portfolio, and it is achieved with much less average investment. An investor with even a little faith in her ability to pick the best commodity investment is not crazy to hold a single commodity rather than a diversified portfolio, as long as (and I emphasize how important this is) she knows how to size the bet correctly. Investors with no knowledge should always diversify but for active investors the best portfolio, in my opinion, is usually the one that can be sized most accurately, rather than the most diversified or highest Sharpe ratio or highest expected return one.


pages: 202 words: 58,823

Willful: How We Choose What We Do by Richard Robb

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

Most of those with for-itself black swanitis will gradually reconstitute their beliefs to fit the new environment, while a few will act despite their uncertainty. Stock-Picking and Identity When I ask my students, “Of those who invest in the stock market, how many pick your own stocks?” hands shoot up. Next, I ask: “How many of you invest in a diversified portfolio, such as the S&P 500?” No hands. Finally, I ask: “How many of you know that a non-diversified portfolio conflicts with economic theory?” They all raise their hands and laugh. My students are not alone in ignoring the precept that they can maximize return and minimize risk by holding a portfolio of assets that is diversified. Investors often diversify far less than the capital asset pricing model advises and overweight their portfolio toward their home country more than transaction costs alone can justify.

Ricardo made his bet and won big.2 If pressed for a reason, Ricardo might have argued that British government bonds offered a high potential reward for the risk. On the surface, this looks like a clear proposition, similar to “investors can achieve higher expected returns and less risk with a diversified portfolio than with a portfolio of a few randomly selected stocks” or that “stocks that pay high dividends generate, on average, higher total returns than stocks that pay no dividends.” But unlike Ricardo’s proposition, these two statements can be tested against data and proven true or false. Suppose France had won, or Britain had won but the bonds didn’t appreciate as Ricardo expected.

And since markets are efficient, it was foolish to even entertain the idea that you might beat them. But that argument is too simplistic. It’s possible to hold simultaneously the views that markets are efficient and agents are rational, and that at least some investors can expect returns beyond what they might earn with a diversified portfolio of stocks. To realize these returns, an investor must act out of character on an informed hunch. For-itself trading falls beyond, and so reveals a limit to, market efficiency. Institutional Investing Let’s start by taking a look at credit markets that are the domain of public and private pension funds, sovereign wealth funds, insurance companies, university endowments, and other institutional investors.


pages: 274 words: 60,596

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

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

Table 3.2 The World’s Actively Managed Stock Market Mutual Fund Fees Source: “Mutual Fund Fees Around The World,” Oxford University Press, 200831 Country Total Estimated Expenses, Including Sales Costs Ranking of Least Expensive to Most Expensive Actively Managed Funds Netherlands 0.82% #1 Australia 1.41% #2 Sweden 1.51% #3 United States 1.53% #4 Belgium 1.76% #5 Denmark 1.85% #6 France 1.88% #7 Finland 1.91% #8 Germany 1.97% #9 Switzerland 2.03% #10 Austria 2.26% #11 United Kingdom 2.28% #12 Dublin 2.40% #13 Norway 2.43% #14 Italy 2.44% #15 Luxembourg 2.63% #16 Spain 2.70% #17 Canada 3.00% #18 Who’s Arguing against Indexes? There are three types of people who argue that a portfolio of actively managed funds has a better chance of keeping pace with a diversified portfolio of indexes after taxes and fees over the long term. Introduced first, dancing across the stage of improbability is your friendly neighborhood financial adviser. Pulling all kinds of tricks out of his bag, he needs to convince you that the world is flat, that the sun revolves around the Earth, and that he is better at predicting the future than a gypsy at a carnival.

They might try telling you that they know when the economy is going to self-destruct, which stock market is going to fly, and whether gold, silver, small stocks, large stocks, oil stocks, or retail stocks are going to do well this quarter, this year, or this decade. But they are full of hot air. Pension fund managers are more likely to know oodles more about making money in the markets than financial advisers or brokers. Knowing that pension fund managers are like the gods of the industry, how do their results stack up against a diversified portfolio of index funds? Most pension funds have their money in a 60/40 split: 60 percent stocks and 40 percent bonds. They also have advantages that retail investors don’t have: large company pension funds pay significantly lower fees than retail investors like you or I would, and they don’t have to pay taxes on capital gains that are incurred.

After the losses that Gilder’s followers experienced from 2000 to 2002, a gain of 3,400 percent would have his long-term subscribers barely breaking even on their original investment after a decade—and that’s if you didn’t include the ravages of inflation. If there are any long-term subscribers, they’re nowhere near their break-even point. Can you hear his followers scrambling on the lowest slopes of the Grand Canyon? I wonder if they’re thirsty. Where there is a buck to be taken We already know that the odds of beating a diversified portfolio of index funds, after taxes and fees, are slim. But what about investment newsletters? You can find more beautifully marketed newsletter promises than you can find people in a Tokyo subway. They selectively boast returns (like Gilder does), creating mouthwatering temptations for many inexperienced investors: With our special strategy, we’ve made 300 percent over the past 12 months in the stock market, and now, for just $9.99 a month, we’ll share this new wealth-building formula with you!


Concentrated Investing by Allen C. Benello

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

A lightbulb turned on when I realized the investors I admire the most (and this admiration comes only in part from the amazing success they’ve achieved) tend to share one characteristic: They are concentrated value investors. That is, they adhere to a concentrated approach to portfolio construction, holding a small number of securities as opposed to a broadly diversified portfolio. We set out to study the mathematical and statistical research that has been done by various academics on the subject of portfolio concentration, and to chronicle the methods and achievements of some of the people who have benefited from being concentrated value investors. Our first task was to approach Lou Simpson and Kristian Siem, two ultrasuccessful concentrated value investors who had never previously agreed to interviews on the mechanics of their investment style.

How, then, does a manager add value over the market? In Simpson’s opinion, a “closet indexer”—an investor who closely follows index components to achieve returns in line with the index without disclosing that they are doing so—and who varies from the index “a little bit here and there and everywhere” won’t outperform.159 A broadly diversified portfolio will likely underperform the market after taking out fees. Simpson concluded that one means of outperforming is to hold a concentrated portfolio of securities where an investor has a lot of conviction. He reached his conclusion 28 Concentrated Investing through an application of common sense, by reading the academic literature, and under Munger and Buffett’s influence.

Full diversification leads to market performance, and minimizes tracking risk. A concentrated holding in a single stock ties the investor’s portfolio wholly to the performance of that stock, and maximizes tracking risk. Modern portfolio theory holds that, as it’s impossible to beat the market other than by chance, the investor’s best option is the most broadly diversified portfolio, perhaps one based on a market index. Value investment theory holds that mispricings do exist, and investors able to identify those mispriced securities can outperform the market to the extent that the portfolio contains proportionately more undervalued securities, and proportionately fewer overvalued securities, than the market.


pages: 571 words: 105,054

Advances in Financial Machine Learning by Marcos Lopez de Prado

algorithmic trading, Amazon Web Services, asset allocation, backtesting, behavioural economics, bioinformatics, Brownian motion, business process, Claude Shannon: information theory, cloud computing, complexity theory, correlation coefficient, correlation does not imply causation, data science, diversification, diversified portfolio, en.wikipedia.org, financial engineering, fixed income, Flash crash, G4S, Higgs boson, implied volatility, information asymmetry, latency arbitrage, margin call, market fragmentation, market microstructure, martingale, NP-complete, P = NP, p-value, paper trading, pattern recognition, performance metric, profit maximization, quantitative trading / quantitative finance, RAND corporation, random walk, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, Silicon Valley, smart cities, smart meter, statistical arbitrage, statistical model, stochastic process, survivorship bias, transaction costs, traveling salesman

Graduation: At this stage, the strategy manages a real position, whether in isolation or as part of an ensemble. Performance is evaluated precisely, including attributed risk, returns, and costs. Re-allocation: Based on the production performance, the allocation to graduated strategies is re-assessed frequently and automatically in the context of a diversified portfolio. In general, a strategy's allocation follows a concave function. The initial allocation (at graduation) is small. As time passes, and the strategy performs as expected, the allocation is increased. Over time, performance decays, and allocations become gradually smaller. Decommission: Eventually, all strategies are discontinued.

López de Prado, M. (2015e): “Why most empirical discoveries in finance are likely wrong, and what can be done about it.” Lecture at University of Pennsylvania. Available at https://ssrn.com/ abstract=2599105. López de Prado, M. (2015f): “Advances in quantitative meta-strategies.” Lecture at Cornell University. Available at https://ssrn.com/abstract=2604812. López de Prado, M. (2016): “Building diversified portfolios that outperform out-of-sample.” Journal of Portfolio Management, Vol. 42, No. 4, pp. 59–69. Available at https://ssrn.com/ abstract=2708678. López de Prado, M. and M. Foreman (2014): “A mixture of Gaussians approach to mathematical portfolio oversight: The EF3M algorithm.” Quantitative Finance, Vol. 14, No. 5, pp. 913–930.

CHAPTER 16 Machine Learning Asset Allocation 16.1 Motivation This chapter introduces the Hierarchical Risk Parity (HRP) approach.1 HRP portfolios address three major concerns of quadratic optimizers in general and Markowitz's Critical Line Algorithm (CLA) in particular: instability, concentration, and underperformance. HRP applies modern mathematics (graph theory and machine learning techniques) to build a diversified portfolio based on the information contained in the covariance matrix. However, unlike quadratic optimizers, HRP does not require the invertibility of the covariance matrix. In fact, HRP can compute a portfolio on an ill-degenerated or even a singular covariance matrix, an impossible feat for quadratic optimizers.


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

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

Then in part four I will give some recommended portfolios in each example chapter, which have been constructed to be as diversified as possible given the level of the volatility target and the available instruments. Correlation If you already owned shares in RBS and Barclays then the last thing you would want to add to your portfolio is another UK bank like Lloyd’s. Generally you should want to own or trade the most diversified portfolio possible, where the average correlation between the assets is lower than the alternatives. If there are a limited number of instruments that you can fit in your portfolio then it makes sense to pick those with lower correlations. Costs Given the choice between two otherwise identical instruments you should choose the cheapest to trade.

If they are perfectly correlated then the portfolio will have a return standard deviation of 10%; the same as the individual assets. But if the correlation between the two assets was 0.5, the portfolio volatility would come out at 8.66%.89 Similarly a correlation of zero gives a volatility of 7.07%. More diversified portfolios have lower volatility. In the framework we are concerned with putting together volatility standardised assets that have the same expected average standard deviation of returns; and to do this we need forecasts to have the same average absolute value. To ensure this is always the case you need to multiply the forecasts or positions you have to account for portfolio diversification, so that your total portfolio also achieves the standard volatility target.

Instrument diversification multiplier Once you’ve parcelled out your trading capital to each trading subsystem you’re faced with a problem you might have seen before in chapter seven, which is the issue of diversification reducing your risk. If you skipped that chapter please go back and read the concept box on page 129. Diversified portfolios of volatility standardised assets like trading subsystems nearly always have a lower expected standard deviation of returns than the individual assets they are trading. The lower the average correlation, the worse the undershooting of risk will be. You already know that the correlation between the two equity indices and the bond in the simple example is very low (the rule of thumb value from table 50 in appendix C is 0.1, and the estimated value I calculated in chapter four was negative).


pages: 367 words: 97,136

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

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

It’s hard to refute the argument that risk should be compensated: asset classes with higher risk should have higher expected returns than those with lower risk, as least over a reasonably long time horizon. There’s an appealing notion of equilibrium behind this approach. But there’s an important subtlety: under the CAPM, risk isn’t defined as the asset’s volatility or exposure to loss. It’s defined as its contribution to a diversified portfolio’s volatility. In other words, expected return on a security or asset class is proportional to its sensitivity (beta) to the world market portfolio. Let us briefly get into some technical details. To calculate an asset’s beta, we multiply (a) the ratio of its volatility to the market’s volatility by (b) its correlation with the market.

It’s also one of the theoretical building blocks of a popular portfolio optimization technique used to avoid counterintuitive optimal weights, called the Black-Litterman model. I’ll discuss this model in Chapter 14. For multi-asset investors, the CAPM is one tool in the return forecasting toolset. Based on a risk model, it gives us an estimate of risk-proportional expected returns, where the only risk that matters is the asset’s contribution to a broadly diversified portfolio’s volatility. At equilibrium, these agnostic estimates make sense, provided we use a good risk model and calibrate the risk-free rate and market risk premium carefully. Still, like a financial law of motion, the model only works in a world without friction. In the real world, markets deviate from equilibrium, sometimes over long periods of time.

During good times, we should seek to reduce the return drag from diversifiers. In our more recent (2018) paper, Rob Panariello and I insist that despite the wide body of published research, many investors still do not fully appreciate the impact of correlation asymmetries on portfolio efficiency—in particular, on exposure to loss. During left-tail events, diversified portfolios may have greater exposure to loss than more concentrated portfolios. Marty Leibowitz and Anthony Bova (2009) show that during the 2008 global financial crisis, a portfolio diversified across US stocks, US bonds, international stocks, emerging markets stocks, and REITs saw its equity beta rise from 0.65 to 0.95, and the portfolio unexpectedly underperformed a simple 60% US stocks/40% US bonds portfolio by 9 percentage points.


pages: 121 words: 31,813

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

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

The shares rebounded and he made a lot of money. The key point here is that although the Hunter invested big in Barclays at the outset, he was prepared to invest a lot more money should it continue to fall, because the odds would have gone from great to extraordinary. If you believe the way to control risk is to have a diversified portfolio, then obviously you have no choice but to invest small stakes in each company. If you are a Hunter, though, you choose not to control risk by diversification but by thoroughly understanding the risk and returns of a particular stock or handful of stocks. Your goal is to find companies that have an unbelievably attractive, asymmetric payoff profile.

This militates against concentrating investments in potential long-term winners. Secondly, regulators – based on investment theories from the 1970s – have put into place rules that prohibit professional fund managers from holding large positions in just a handful of their very best money-making ideas. Why? Because they believe diversified portfolios represent less risk than a concentrated portfolio of stocks. The reality, however, is that all you are doing is swapping one type of risk for another. You are exchanging company specific risk (idiosyncratic risk), which may be very low depending on the type of company you invest in, for market risk (systematic risk).

Phrased differently: “the organization of the money management industry appears to make it optimal for managers to introduce stocks into their portfolios that are not outperformers … [in other words] managers attempt to maximise profits by maximizing assets under management … while investors benefit from concentration … managers under most commonly-used fee structures are better off with a more diversified portfolio.”56 Dangers of being a Connoisseur As the most profitable form of investing, being a Connoisseur is not easy. Not only does it run against some pretty strong impulses, it also comes with some significant dangers that must be watched for. There are three in particular: 1. You can be too late As we covered earlier, Ned Davis, using the Dow Jones Industrial Average Index from 1929 to 1998, showed that the bulk of investors’ returns (more or less half) in bull markets come in the first third of a rally.57 He also showed that the first half of a rally accounts for two-thirds of the overall return in a bull market.


pages: 345 words: 86,394

Frequently Asked Questions in Quantitative Finance by Paul Wilmott

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

We can therefore decompose any portfolio into a linear combination of these five factors, plus some supposedly negligible stock-specific risks. If we are shown six diversified portfolios we can decompose each into the five random factors. Since there are more portfolios than factors we can find a relationship between (some of) these portfolios, effectively relating their values, otherwise there would be an arbitrage. Note that the arbitrage argument is an approximate one, relating diversified portfolios, on the assumption that the stock-specific risks are negligible compared with the factor risks. In practice we can choose the factors to be macro-economic or statistical.

Treynor Ratio The Treynor or Reward-to-variability Ratio is another Sharpe-like measure, but now the denominator is the systematic risk, measured by the portfolio’s beta, (see Capital Asset Pricing Model), instead of the total risk: In a well-diversified portfolio Sharpe and Treynor are similar, but Treynor is more relevant for less diversified portfolios or individual stocks. Information Ratio The Information ratio is a different type of performance measure in that it uses the idea of tracking error. The numerator is the return in excess of a benchmark again, but the denominator is the standard deviation of the differences between the portfolio returns and the benchmark returns, the tracking error.

For there to be no arbitrage opportunities there must be restrictions on the investment processes. Example Suppose that there are five dominant causes of randomness across investments. These five factors might be market as a whole, inflation, oil prices, etc. If you are asked to invest in six different, well diversified portfolios then either one of these portfolios will have approximately the same risk and return as a suitable combination of the other five, or there will be an arbitrage opportunity. Long Answer Modern Portfolio Theory represents each asset by its own random return and then links the returns on different assets via a correlation matrix.


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, Bear Stearns, Black Monday: stock market crash in 1987, buy and hold, collapse of Lehman Brothers, credit crunch, currency risk, diversification, diversified portfolio, estate planning, eurozone crisis, fixed income, high net worth, hiring and firing, Isaac Newton, junk bonds, Kickstarter, lateral thinking, low interest rates, money market fund, Northern Rock, passive investing, place-making, quantitative easing, selection bias, short selling, South Sea Bubble, technology bubble, transaction costs, Vanguard fund

For the novice investor who doesn’t have much time to research individual investments, it is hard to argue against a portfolio of low-cost tracker funds. A well-diversified portfolio for someone investing over the medium/long term for capital growth with a medium-high risk appetite may look something like Table 18.3. table 18.3 A well-diversified portfolio of investments There are, of course, very many variations of the above, but you will see that it is a diversified portfolio that can be put together in literally minutes. Rebalancing your portfolio There are two reasons why you will need to revisit the asset allocation of your portfolio at regular intervals.

Share prices may fall, dividends may be reduced or stopped altogether, companies may even go bust, leaving investors completely out of pocket. It would be foolish to suggest that buying and selling equities like a day trader is going to make you a million. But, despite their risks, a well diversified portfolio of shares is likely, in the long term, to generate higher returns than you would get from most other asset classes. Top websites www.advfn.com www.fool.co.uk www.investorschronicle.co.uk www.londonstockexchange.com www.moneyam.com www.sharesmagazine.co.uk chapter 13 * * * Corporate bonds and gilts Less risky than equities but usually returning more than a bank or building society, bonds aim to give a steady income through good times and bad.

But if you are saving to repay a mortgage on your holiday home in Spain, then this is a very real risk. Liquidity risk – this is most relevant when investing in obscure investments. You need to ensure you can easily sell your investment when you need to. Sector risk – one sector may perform very badly, and unless you have a well-diversified portfolio this could really hit your investment return. Tax risk – tax rules will change over time and you need to ensure that you keep abreast of these changes to ensure you maintain a tax-efficient investment strategy. Like you did with your investment objectives, try writing down some of the risks you are worried about, using the examples and the risk-profiling tools mentioned here.


Mastering Private Equity by Zeisberger, Claudia,Prahl, Michael,White, Bowen, Michael Prahl, Bowen White

Alan Greenspan, asset allocation, backtesting, barriers to entry, Basel III, Bear Stearns, book value, business process, buy low sell high, capital controls, carbon credits, carried interest, clean tech, commoditize, corporate governance, corporate raider, correlation coefficient, creative destruction, currency risk, deal flow, discounted cash flows, disintermediation, disruptive innovation, distributed generation, diversification, diversified portfolio, family office, fixed income, high net worth, impact investing, information asymmetry, intangible asset, junk bonds, Lean Startup, low interest rates, market clearing, Michael Milken, passive investing, pattern recognition, performance metric, price mechanism, profit maximization, proprietary trading, risk tolerance, risk-adjusted returns, risk/return, Savings and loan crisis, shareholder value, Sharpe ratio, Silicon Valley, sovereign wealth fund, statistical arbitrage, time value of money, transaction costs, two and twenty

Exhibit 18.4 LP PE Portfolio Evolution TARGET RETURN: An LP’s target return for its PE allocation will have a direct impact on manager selection, portfolio construction and regional allocation. Return expectations for developed markets tend to be lower than those for emerging markets; similar for later stage investment strategies versus early stage investment strategies. The level of diversification in a portfolio also has an impact on its expected return: broadly, diversified portfolios reduce the volatility of returns by smoothing out the impact of individual funds’ outperformance or underperformance, while concentrated portfolios provide a wider range of expected returns (for better or worse) as the impact of an individual fund’s performance will be more pronounced. IN-HOUSE OR OUTSOURCED TEAMS: LPs must decide whether to execute a PE program in-house or outsource the investment function.

IN-HOUSE OR OUTSOURCED TEAMS: LPs must decide whether to execute a PE program in-house or outsource the investment function. This build or buy decision with regards to investment decision-making defines how much internal resources and know-how are required. In-house programs require a team with investment expertise, skills to construct a well-diversified portfolio, experience in manager selection and a large network to access attractive fund offerings. LPs often start with an allocation to PE through a fund of funds6 or engage advisors to craft custom mandates to PE, then gradually build expertise to allocate directly to PE funds. Even seasoned LPs will at times rely on the selection skills of external managers to access markets outside their expertise (especially emerging markets) or, in the case of large investors, allocate to smaller funds that are unable to accommodate their minimum check size.

Source for the MSCI World and JP Morgan Global Government Bond Index: Bloomberg. 3 Please refer to Chapter 1 Private Equity Essentials for a clear explanation of the mechanics of PE funds. 4 J-curves were introduced in Chapter 1 Private Equity Essentials; the J-curves in Exhibit 18.4 plot the LP’s cash flows from four separate $10 million commitments to the funds shown in the exhibit. 5 All funds in the hypothetical LP’s portfolio have the cash flow characteristics of the J-curve detailed in Chapter 1 and a steady evolution of fund NAV. Commitments are made to the portfolio on January 1 of each year and the hypothetical LP can allocate the exact amount it desires to the hypothetical fund. 6 Fund of funds aggregate capital from multiple investors and invest in a diversified portfolio of PE funds. They act as a single LP in a fund and may be able to negotiate fee discounts on behalf of their clients. 7 Please refer to Chapter 21 LP Direct Investment for more on LP co-investment and direct strategies. 8 See Chapter 14 Responsible Investment for more on environmental, social and governance considerations. 9 Harris, Jenkinson, Kaplan, and Stucker (2014). 10 The number refers to professional fund management firms; but estimates vary widely on the number of active fund managers (source: Prequin 2016). 11 Please refer to Chapter 23 Risk Management for further discussions on risks and risk mitigants in PE. 12 We assume a fund life of 10 years for all funds in the portfolio, which causes the number of funds and fund manager relationships to flatten from year 10 onwards as new funds replace those funds at the end of their terms. 13 Please refer to Chapter 24 Private Equity Secondaries for additional information. 14 Please refer to Chapter 21 LP Direct Investment for further reading. 19 PERFORMANCE REPORTING Performance reporting is the formal process through which general partners (GPs) communicate a fund’s activity and interim returns to limited partners (LPs) throughout the holding period.


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

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

Take a look at the chart on page 74, which illustrates this point. 74 Your Broker or Advisor Is Keeping You from Being a Smart Im"eStor RISK RETURN COMPARISON (DitlI'Iri8l: 1911-2005) 11m _ • C*dI Yur lois AmgII AuuaJ II!ln • &1M SIKb 141M iIIJlIk ....... "" .,.. "" ... '" "' "" ,"' "" . . As you can see, if you invested in a diversified portfolio consisting of 100% stocks during the period 1977 to 2005, your average rerum would have been 1 1.7%. Your worst loss in any one calendar year would have been 15.1%. However, if you had a diversified portfolio invested in only 60% stocks and 40% bonds, your average rerum would have been 11.0%--only 0.7% less than the 100% stock portfolio. However, your worst loss in anyone year-instead of bei ng 15. 1% with the 100% stock portfolio-would have been only 6.2%.

As I have explained, no one can predict which stock or which bond will increase in value, or when it will increase. And no one wi ll know when or by how much the entire market will increase in value. Therefore, investors should own the entire market. By the «entire market," I mean a broadly diversified portfolio of investments in domestic and international markets. Let's take anomer look at (he chart on the following page that I showed you in Chapter 4. It tells you precisely which 180 The Real \vily Smart Im'estors Beat 95%or the "Pros- ETFs to select, and what percentage of your portfolio should be invested in each ETF, depending on the portfolio you have selected.


pages: 357 words: 91,331

I Will Teach You To Be Rich by Sethi, Ramit

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

BECAUSE OF INFLATION, YOU’RE ACTUALLY LOSING MONEY EVERY DAY YOUR MONEY IS SITTING IN A BANK ACCOUNT. In 2008, when the global financial crisis really erupted in the stock market, the first thing many people did was pull their money out of the market. That’s almost always a bad move. They compounded one mistake—not having a diversified portfolio—with a second: buying high and selling low. For all the people who blamed the government, CEOs, and evil banks, had any of them read one personal finance book? And yet they expected to get ahead with their money? Let’s put the excuses aside. What if you could consciously decide how to spend your money, rather than say, “I guess that’s how much I spent last month”?

As Warren Buffett has said, investors should “be fearful when others are greedy and greedy when others are fearful.” For you, it’s different. You understand how investing works, so you can put a long-term perspective into practice. Yes, in theory it’s possible for you to lose all your money, but if you’ve bought different investments to create a balanced (or “diversified”) portfolio, you won’t. You’ll notice that your friends are concerned with the downside: “You could lose everything! How will you have time to learn to invest? There are so many sharks out there to take your money.” What about the downside of the money they’re losing every day by not investing? Ask your friends what the average return of the S&P 500 has been for the past seventy years.

With their low fees, they are a great choice if you want to create and control the exact makeup of your portfolio. But what if you’re one of those people who knows you’ll just never get around to doing the necessary research to figure out an appropriate asset allocation and which index funds to buy? Let’s be honest: Most people don’t want to construct a diversified portfolio, and they certainly don’t want to rebalance and monitor their funds, even if it’s just once a year. If you fall into this group, there is the option at the very top of the investment pyramid. It’s an investment option that’s drop-dead easy: lifecycle funds. Lifecycle Funds: Investing the Easy Way Whether you’re just arriving here direct from page 165, or you’ve read through the basics of investing and decided you want to take the easy way after all, no problem—lifecycle funds are the easiest investment choice you’ll ever need to make.


pages: 149 words: 43,747

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

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

.), philanthropic Capital (we focus on education, ALS, and helping military families), and our “fun” capital bucket (assets we like to enjoy but where we are not fixated on financial return). With our personal capital Mary Ann and I are still fairly young, and thankfully healthy, so we have a fairly aggressive growth portfolio. We invest in a diversified portfolio consisting of index funds in the core part of portfolio, managed money for small cap and international, and currently have a 10% allocation to both fixed income and cash. I am a believer in investing in things you know with people you know. In the past that drove us to buying other finance stocks of companies that were run by people I knew and respected.

If all investment research is based on past data (there is no other data), then any portfolio deemed “optimal” is out of date before it even begins because we are investing into the future where everything is unknown. In other words, we can’t know what optimal is until the future gets here, at which point it’s too late. If there are no facts about the future, why bother trying to optimize something that is entirely unoptimizable? I believe being willing to stick to a diversified portfolio of index funds is the closest thing to an investing superpower that exists in the age of shiny object syndrome. Patience seems to be a much simpler and more satisfying road to our financial goals than always trying to find the next best thing. We currently contribute monthly to my Roth 401(k) and our taxable account.

When I make a charitable donation, Betterment pulls the most highly appreciated shares from any taxable account, and I maximize my impact while minimizing my taxes. The investment portfolio So, here’s the boring part. Pretty much all my money is held at Betterment. They invest me in a low-cost globally diversified portfolio of ETFs. Betterment is responsible for pretty much everything: fund due diligence, rebalancing, managing inflows and outflows, tax loss harvesting, managing the glide path, and asset location. I don’t have to do much besides save and withdraw when needed. The funds tend to be a split between Vanguard and iShares.


pages: 337 words: 89,075

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

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

But small-cap stocks offered the most intriguing choice: They delivered a much higher annual rate of return during the sample period—but with greater volatility. So, the question is straightforward: Do higher rates of return compensate an investor for the added risk? Arguably, systematic risk is the most important risk measure for investors who are considering the addition of an asset class to a diversified portfolio.3 According to the capital asset pricing model (CAPM), the only risk priced (that is, a risk that requires a higher rate of return) is risk correlated with the market. This is otherwise known as systematic risk, or market risk. Risk not correlated with the market is not priced because it can be diversified away.

CAPM Beta Jensen’s Alpha T-Statistics Sharpe Ratio Small Cap 1 5.64% 2.07 0.65 Large Cap 1 0.00% Growth 1.06 –1.46% 1.87 0.43 Value 0.93 0.81% 1.67 0.60 International 0.62 –1.27% 0.04 0.29 0.53 Strategic Asset Allocation Based On… Period Sharpe Ratio 0.66 0.03% 24.09 0.72 Yearly Sharpe Ratio 0.52 0.02% 24.58 0.63 Market Weights 0.54 0.1% 27 0.57 Comparing the Historical- and Market-Based Allocations As I pointed out in Chapter 1, “In Search of the Upside,” financial economics developments over the past three decades provide us with the necessary tools to develop risk-adjusted returns in a rigorous and systematic way. Arguably, systematic risk is the more important risk measure for investors who are considering adding an asset class to a diversified portfolio. According to the capital asset pricing model (CAPM), the only sort of risk priced (that is, risk requiring a higher rate-of-return) is systematic risk, which is correlated with the market. The CAPM offers a way to estimate systematic risk for different asset classes (that is, beta) as well as precisely measure the additional return (that is, alpha) provided by an asset class over that required to compensate for the systematic risk.

Second, and equally important, is the SAA would have significantly reduced the portfolio’s overall volatility while producing market-like returns. The numbers reported in the previous chapter in fact show the SAA’s great benefit, and the diversification produced by the strategy, are best described in risk reduction terms. But, the data nevertheless clearly show the SAA, as promised, delivers a diversified portfolio producing lower risk without sacrificing returns. That’s a good deal. But, if good in this case only means good enough, the good is the enemy of the best. The challenge now is to develop an allocation strategy that delivers even better risk-adjusted returns than the market SAA. The data reported in Chapter 2, “The Case for Cyclical Asset Allocation,” show for approximately 80 percent of the time during our 30-year sample period, the optimal size, style, location, and equity/fixed-income allocation was a corner solution (that is, a 90 percent or greater allocation to one of the choices).


pages: 358 words: 104,664

Capital Without Borders by Brooke Harrington

Alan Greenspan, banking crisis, Big bang: deregulation of the City of London, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, classic study, complexity theory, corporate governance, corporate social responsibility, diversified portfolio, emotional labour, equity risk premium, estate planning, eurozone crisis, family office, financial innovation, ghettoisation, Great Leap Forward, haute couture, high net worth, income inequality, information asymmetry, Joan Didion, job satisfaction, joint-stock company, Joseph Schumpeter, Kevin Roose, liberal capitalism, mega-rich, mobile money, offshore financial centre, prudent man rule, race to the bottom, regulatory arbitrage, Robert Shiller, South Sea Bubble, subprime mortgage crisis, the market place, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, transaction costs, upwardly mobile, wealth creators, web of trust, Westphalian system, Wolfgang Streeck, zero-sum game

Indeed, a common denominator of the growth strategies that wealth managers devise for their clients is that they are “deliberately structured to eliminate virtually all investment risk.”74 This flies in the face of the economic theories underpinning modern capitalism, in which financial rewards come only to those who accept risks.75 That is the basis of the entrepreneurial ideal, and of the legitimacy historically accorded to great fortunes. But one of the things the wealthy can do better than others is hedge their risks. This occurs on a number of fronts simultaneously, from the use of legal fig leaves such as opinion letters and the sheltering of assets in judgment-proof Cook Islands trusts, to the choice of a diversified portfolio of investments.76 Having all one’s eggs in a single basket, financially speaking, makes one’s wealth very vulnerable to economic downturns. Those whose wealth is spread among stocks and bonds, real estate, art, and cash are in a much better position to withstand market declines—or even take advantage of them.

See also asset-holding structures; wealth Austen, Jane, 42 authority: divine, 40; of ecclesiastical courts, 41; feudal, 296; patriarchal, 86, 112–14, 121; professionals invested with, 96; rational-legal form of, 113; respect for, 88; state, 21, 25, 76, 236, 240, 243–52, 253, 268, 269, 289, 292 “Baby Mama Trust,” 159, 260, 268 Bahamas, 157, 167 bankers: family banks, 251, 269; family institutions take on functions of, 250–52; fiduciary responsibility absent for, 63; nineteenth-century growth of trust in, 75; offshore banking, 138, 196, 255; on trusts managers, 62–63; wealth managers compared with, 4, 83 bankruptcy: corporations’ limited liability, 182; discretionary trusts provide protection from, 156; foundations as subject to, 180; in private trust company structure, 190; special-purpose vehicles provide protection from, 19; tightening of laws of, 156–57; trustees as at risk of personal, 49; VISTA structure and, 170 bargaining, 106, 107 barriers to access, 22–27 Bayeux Tapestry, 41 bearer shares, 184, 185 Beckert, Jens, 202 Belize, 157, 301 beneficial owners: in divorce procedures, 162–63; nominee shareholders as, 183–84; registries of, 301; tiered assets and, 189; trustees act as, 49 Bentham, Jeremy, 204 Bermuda, 8, 9, 167, 188, 254 Bessemer Trust, 191, 250 “big government,” 252 Bleak House (Dickens), 1–2 blind trusts, 206 bonds: British trustees prefer to invest in, 49; buying up after financial crisis of 2008, 211; diversified portfolios, 211; wealth managers had to become knowledgeable about, 288 bonuses, 60 borders: abolishing, 293; controls, 239, 247 borrowing, trusts increase cost of, 221 Bourdieu, Pierre, 93, 94, 96, 98, 103, 121, 217 Brazil, 147, 224 bribery, 147, 223 BRICS countries, 107, 161, 178 British Virgin Islands (BVI): as captured state, 262–67; cash flown in to banks in, 139; double-taxation treaty with United States, 262; as former British colony, 254; International Business Corporation Act, 262–63, 265, 267; interviews for this study in, 32; makes itself hospitable to wealth management industry, 264–65; offshore business as mixed blessing for, 253; Payroll Act, 265; Russians and Chinese base offshore corporations in, 146–47; seen as specializing in theft, 296; standard of living in, 265; subsumes its own culture to high-net-worth individuals, 263–64; in typical client scenario, 8, 188; VISTA (Virgin Islands Special Trusts Act) trusts, 57, 114–15, 168, 169–70, 177, 185, 222 Bruce (Geneva-based practitioner), 62, 68–69, 72, 110–11, 112, 116, 147, 148, 178, 234 Bubble Act (1720), 48, 181, 314n44 Buffett, Warren, 18 Burke, Edmund, 238 Bush, George W., 16 BVI.

See British Virgin Islands (BVI) campaign contributions, 18, 223 Canterbury Tales (Chaucer), 44, 46 capital: circuit between private and corporate wealth, 74; concentration of, 214, 217; cultural, 94, 95, 96, 102, 121, 286, 288; fungibility of, 290; gains, 150, 152, 175, 199; global flows of, 21, 22, 219, 235, 248, 256, 259, 300, 235, 248, 300; human, 60, 218, 220; hypermobile, 12, 126, 236; internationalization of, 53; loosening of controls on, 235; mobility of, 124, 129, 133, 134, 139, 236, 240, 256; reputational, 14–15; surplus, 194; taxes on capital gains, 150, 152, 175; as transnational, 12, 261, 269; wealth shifts from land to, 48 capitalism: fiduciary, 272; income inequality and, 204; industrial, 47, 51, 125; legal powers granted to corporations and modern, 74; professional wealth management emerges with transformation of, 5, 125; risk-reward relationship in, 211; Statute of Elizabeth of 1571 in development of, 155; STEP frames its work as defense of, 226; supersession of nation-state as organizing principle of, 235; transformations in, 5, 51, 74, 125; trust and estate planning’s emergence and transformation of, 51, 125; trustees in institutional integration of stable capitalist class, 51; wealth managers in conflict with dynamics of, 18 Cardozo, Benjamin, 46 care, fiduciary duty of, 45–46, 87 Caribbean: Bahamas, 157, 167, 157, 167; Turks and Caicos, 167, 255. See also British Virgin Islands (BVI); Cayman Islands Carlos (Buenos Aires–based practitioner), 148, 149, 300–301 Carnegie, Andrew, 292 cash: Chinese desire for offshore, 143; diversified portfolios, 211; in high-end real estate transactions, 144–45; transporting to offshore banks, 138–40 cash-for-passports programs, 239–40, 290 Cayman Islands: beneficial ownership registry in, 301; Chinese base offshore firms in, 145, 177; divorce-protection trusts in, 162–63; as former British colony, 254; interviews for this study in, 32; in Iran-Contra affair, 260; legislation to block court control over inheritance in, 167; STAR (Special Trusts Alternative Regime) structure, 168, 169, 170–71, 177, 185, 276; taxation in, 175; in trade-restriction avoidance, 159; in typical client scenario, 7–8, 188 Channel Islands: central location of, 130; feudal remnants in, 37; as former British colony, 254; offshore financial centers in, 129.


The Handbook of Personal Wealth Management by Reuvid, Jonathan.

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

His previous assignments have included working for the Corporate and Investment Bank in equity derivatives, where he performed diverse roles including senior profit and loss analysis, risk management and warrants trading. 1 Introduction In 2008 conventional private investor thinking was turned upside down following the ‘credit crunch’ and the ensuing stream of dismal revelations of imprudent bank lending, financial products based on the packaging of toxic debt and inadequate financial sector regulation. Previous conceptions of what were safe forms of investment and how diversified portfolios could be structured at acceptable levels of risk were tossed aside. High-net-worth individuals (HNWs) and others with significant capital assets, including pension pots, available for investment have had to rethink their investment strategies. Financial institutions and advisers were caught on the hop too and have had to tighten their investment analysis and due diligence routines.

There are various return drivers, including sector selection, market capitalization positioning, stock selection, and how managers vary the total amount held in long and short positions. Funds may also use leverage, meaning that portfolios can range from riskier highly leveraged focused portfolios to more diversified portfolios with less or no leverage. Managers can add positions based upon top-down and/or bottom-up fundamentals or technicals. 26 BESTINVEST WEALTH MANAGEMENT SERVICE Investing shouldn’t be a numbers game Bestinvest has been providing investment counsel for over 20 years. We’ve been through five recessions, six Chancellors of the Exchequer, black Monday, black Wednesday and more than a fair share of bleak outlooks.

Looking at each type of investment we can briefly summarize their characteristics as follows: ឣ Funds – Single or multiple funds. – Tend to be illiquid (unless one of the open-ended variety with short-based redemption periods). – Difficult for investor to see value of single assets. – Well-diversified portfolio. – Single or multiple strategy. – Access to established fund managers with excellent access and expertise to their marketplaces. – Reduced management risk at asset level. – Debt, if used, is accessed via the fund manager; thus the individual investor does not have to acquire his/her own debt.


pages: 385 words: 128,358

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

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

The global macro hedge fund strategy has the widest mandate of all hedge fund strategies whereby managers have the ability to take positions in any market or instrument. Managers usually look to take positions that have limited downside risk and potentially large rewards, opting for either a concentrated risk-taking approach or a more diversified portfolio style of money management. Global macro trades are classified as either outright directional, where a manager bets on discrete price movements, such as long U.S. dollar index or short Japanese bonds, or relative value, where two similar assets are paired T 1 2 INSIDE THE HOUSE OF MONEY on the long and short sides to exploit a perceived relative mispricing, such as long emerging European equities versus short U.S. equities, or long 29year German Bunds versus short 30-year German Bunds.

The simplest version is you want a carry trader, a fund that earns regular income; and you want a gamma trader, one that looks for the huge move.You want someone who’s going to make you the regular money when things are normal and quiet, and the guy who’s going to make you a lot of money when things really move. That’s how you develop a diversified portfolio. Not by diversifying through markets or by geographic regions but through how they trade. The great trades in global macro are when you combine carry with gamma.When a high yielding currency is cheap, for example, is when you can get tremendous outsized returns. THE RESEARCHER 129 Why do you think asset allocators find global macro the most difficult of the hedge fund strategies to understand?

It was an outstanding trade. 4.5 4.0 Getting a Bit Hairy Yield (%) 3.5 3.0 Position Entered at 3.4% Yield 2.5 2.0 Exit at Initial 1.5% Yield Target FIGURE 15.1 1997–2003 10-Year Treasury Inflation-Protected Securities (TIPS), Source: Bloomberg. 20 03 2 20 0 01 20 0 20 0 99 19 98 19 19 97 1.5 THE FIXED INCOME SPECIALISTS 319 Were you able to hold on to the position because you were running a broadly diversified portfolio? Gorton: Exactly. We had other trades on that were doing well. We also hung on to that trade for so long because it was so outstandingly good. I have never seen a yield curve that was as mispriced as the yen curve at that time. Other great trades over the years were curvature and conditional steepener type trades on the U.S. yield curve back in 2001 when nobody understood them.


pages: 432 words: 106,612

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

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

In the conclusion to his letter to the Post’s owner, Buffett therefore laid out his recommendations: Either stay the course with a bunch of big, mainstream professional fund managers and accept that the newspaper’s pension fund would likely do slightly worse than the market; find smaller, specialized investment managers who were more likely to be able to beat the market; or simply build a broad, diversified portfolio of stocks that mirrored the entire market. Buffett obliquely noted that “several funds have been established fairly recently to duplicate the averages, quite explicitly embodying the principle that no management is cheaper, and slightly better than average paid management after transaction costs.”

Rex Sinquefield, then a student at Chicago’s business school, noted, somewhat tongue-in-cheek, that “if I had to rank events, I would say CRSP is probably slightly more significant than the creation of the universe.”37 Lorie himself stressed that professional investors “can be and almost certainly are useful.” They performed a valuable service in simply convincing people to invest in stocks—which, as he had shown, offered superior returns to bonds and money deposited in a bank account—and provided a relatively efficient way of gaining a diversified portfolio of them. After all, the cost of bookkeeping and custodial work could be significant, and the service that professionals offered smaller investors in reducing the “agony of choice and responsibility” was valuable, Lorie argued.38 Nonetheless, he took a stab at explaining why the average returns of professional money managers didn’t seem to be able to beat the market.

The genesis of index funds was the realization that most people—whether experienced professional money managers, a dentist investing for their retirement, or unemployed twentysomethings day-trading to make a quick buck—make terrible investors. The best long-term results come from buying a big, well-diversified portfolio of financial securities, and trading as little as possible. Jack Bogle built a vast financial empire around these two basic principles. Yet there is in practice little meaningful difference between taking a bet on a hot dotcom stock and on a biotech or robotics ETF. The line between “active” and “passive” investing has always been a fuzzy one, given that choosing what index fund to invest in is unavoidably an active choice.


pages: 695 words: 194,693

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

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

Lowenfeld concentrated on the recent past, the period of intense growth in the world markets. These data, once collected and studied, showed him that spreading investments internationally made the overall portfolio less risky. As a result, he reasoned, a truly diversified portfolio had to be spread over the entire world. And investors needed a convenient exchange to build such an ideal, modern diversified portfolio. Lowenfeld constructed a beautiful example using only railway securities. Bonds from one industry in a single country are usually highly correlated, but the Lowenfeld portfolio invested equally in ten railroad bonds from around the world: British, Canadian, German, Sardinian, Indian, Egyptian, American, Mexican, Argentinean, and Spanish; all with about the same yield.

It offered its services on a strictly fee basis—eliminating some of the extreme conflicts of interest held by other firms. Unlike big Wall Street companies, Investors Management Company did not underwrite securities and then park the failures in their investment trusts. The firm offered two products: Fund A and Fund B. Both allowed investors to hold a diversified portfolio of common stock, formed chiefly according to the principles outlined in his book. Fund A planned to pay out 5% per year in dividends, which was the rate Smith figured was a sustainable yield based on historical analysis. Fund B allowed investors to plow back all dividends by reinvesting in more common stock shares.

Although the Investors Management Company Funds A and B were not the very first mutual funds in America, they were very prominent and immediately attracted imitators. Just as suddenly as Americans became infatuated with buying stocks, they fell in love with investment trusts. The simple idea of pooling investor money and buying a diversified portfolio of securities is a great one and is certainly not new. After all, the Dutch invented mutual funds every bit as sophisticated. The British model for American funds—including the famous Foreign and Colonial Government Trust—was widely acknowledged in the 1920s. Trusts were even referred to as a “British” style of investing.


pages: 162 words: 50,108

The Little Book of Hedge Funds by Anthony Scaramucci

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

So, what is a fund of hedge funds? As the name implies, it is a fund that invests in other hedge funds. In creating and managing a portfolio of various hedge funds, a fund of hedge funds manager thematically blends together funds so as to maximize returns while minimizing risk. To do so, he must create a diversified portfolio that is composed of funds that exhibit low correlations with the overall market, experience solid performance, and have lower volatility. Thus, funds of hedge funds are the ultimate vehicle for investors who want to take advantage of the various benefits of hedge fund investing. If done properly, smaller investors—who historically do not have the sizable minimums required to get access to hall of fame hedge fund managers—allot their capital to this alternative asset, with the capital being stewarded judiciously to an able-minded group that is constantly and dynamically shifting the portfolio.

For example, for as little as $50,000 a Registered Investment Company (RIC) provides individuals with access through the same aggregation that a fund of funds provides. These types of products put relatively small investors in the catbird seat, benefitting from the aggregation but also from the rigorous analysis and risk management. Diversification = Mitigated Risk As discussed previously, a fund of hedge funds holds a diversified portfolio of various hedge funds that invest in different asset classes, alternative investment styles, and geographic regions. Although there is not a magic number, it is recommended that a fund of hedge funds invest in about 30 to 50 managers, with the typical sweet spot being around 35 to 40 managers.

How or why did you get started in the industry? My career began in the capital markets focused on sales and trading across currencies, interest rates, equities, and later derivatives. From that I migrated to structured investment products and then to CIO of an asset management business focused on globally diversified portfolios of stocks, bonds, and cash. Around that same time hedge funds were starting to become recognized investment alternatives with attractive risk adjusted returns and correlation characteristics. Therefore, I began to explore how to utilize them within a portfolio of traditional asset classes to create portfolios that would be more efficient.


pages: 332 words: 81,289

Smarter Investing by Tim Hale

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

What has changed, and changed for the better, since the previous edition is the number and quality of passive fund providers and sensible passive products available to retail investors. The arrival of Vanguard has caused a revolution in product and huge pressure on pricing which is all great from a Smarter Investor’s perspective. It is now easy to construct and administer a robust and well-diversified portfolio using online broker platforms. The implementation section of the book provides insight into some of the funds that investors can research to fill each slice of their portfolio pie. The nature of financial advice has changed too. On 1 January 2013, a new regime came into being that effectively bans all commission payments by providers to advisers.

This includes regular rebalancing of portfolios back to their original mix on a regular basis, selling out of assets that have performed well and re-investing in assets that have done less well – a systematic, contrarian investment process. Mental tick box 8: Accept that you are prone to emotional pressures that drive you to do the wrong thing at the wrong time. Learn to be comfortable with the diversified portfolio that you own. Lean heavily on your adviser, when you need support at times of emotional, investment-related weakness. Tip 9: There are no perfect answers Let me tell you that there are no perfect answers to investing and this book does not seek to provide any. But there are better and worse solutions.

At the end of the day, the various decisions we are going to consider making are trying to improve (a) just owning global equities and (b) simply owning cash. That does not mean that these incremental decisions are not of value, they are – just like the time and effort David Brailsford spends with his helmet design and wind tunnel tests. It makes good sense to try to construct more robust and better diversified portfolios based on the evidence we have to hand, a bit of hard thinking and a good dose of common sense. What does not make sense is getting caught up in overcomplicated software models, taking on risks that are not adequately rewarded or the myriad of faddish sectors and market ‘opportunities’ peddled by those who think that complexity justifies their fees.


pages: 321

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

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

As the number of alphas increases, however, different techniques to measure the correlation coefficient among them become more important in helping the investor diversify his or her portfolio. Portfolio managers will want to include relatively uncorrelated alphas in their portfolios because a diversified portfolio helps to reduce risk. A good correlation measure needs to identify the uniqueness of one alpha with respect to other alphas in the pool (a smaller value indicates a good uniqueness). In addition, a good correlation measure has the ability to predict the trend of movement of two alpha PnL vectors (time-series vectors).

It can also help more-experienced quants, who have the ability to define the entities that constitute each axis and then analyze existing alphas in their portfolios, to target their efforts with greater efficiency. New quants can easily be overwhelmed by the challenge of trying to develop alphas. They ask themselves, “How do I find alphas? How do I start the search?” Even experienced quants working with many alphas can miss key components required to build a robust, diversified portfolio. For instance, one of the most difficult aspects of alpha portfolio construction is the need to optimize the level of diversification of the portfolio. In automated trading systems, decisions on diversification make up a major area of human intervention. It’s not easy to visualize the many pieces of the portfolio, which contain hundreds or thousands of alphas, and their interactions.

Published 2020 by John Wiley & Sons, Ltd. 84 Finding Alphas diversifying their portfolios, they may just be developing the same kinds of alphas over and over again. Although they may appear to have low correlation, variants of the same alpha types tend to have the same failure modes and do not provide the full benefit of a truly diversified portfolio. Nearly everyone falls into this trap when they begin to research alphas. Every successful quant has a gold mine; he digs deeper and deeper in his mine to extract as much as he can. One person develops a very strong momentum site; another has a very strong fundamental site; a third builds a very strong reversion site.


pages: 1,164 words: 309,327

Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

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

If you have ever listened to speeches by a Fed chairman or a Fed governor, you know that they rarely say anything interesting about interest rates. They do not want to reveal any information that would allow informed traders to predict the future course of interest rates. ◀ * * * Diversified Portfolios Relative spreads will be smaller for contracts on well-diversified portfolios than for the individual assets in the portfolio. Although traders may have significant material information about individual assets, such information rarely is material to all assets in the portfolio. A large portfolio dilutes the importance of information about any single constituent asset.

In a symmetric distribution, outcome probabilities depend only on their distance from the median value of the distribution. The probabilities of outcomes at equal distances above and below the median therefore are the same. The returns of well-diversified portfolios are approximately symmetrically distributed. Although there are some systematic departures from symmetry (large negative values are slightly more common than large positive values), these departures usually affect index returns as well. Accordingly, market-adjusted returns tend to be quite symmetric for well-diversified portfolios because the asymmetries in the portfolio and index returns offset each other. Certain portfolio strategies, however, can produce highly asymmetric return distributions.

Susan needs short-term capital losses to offset her capital gains. Unfortunately—actually fortunately—she does not have any positions with losses that she can sell. To solve her problem, Susan decides to buy the Mexico Fund (MXF) and short sell the Mexico Equity and Income Fund (MXE). These two funds are unrelated closed-end funds that own diversified portfolios of Mexican stocks. Although Mexican stocks are often quite volatile, the combined position is not very risky because the returns to these two funds are very closely correlated. If the Mexican stock market rises before the end of the year, Susan will realize her loss on her short MXE position and carry her gain in MXF over into the next year.


pages: 201 words: 62,593

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

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

In other words, you’ve got to diversify—which means that instead of investing all of your money in just one or two places, you spread it around. Now spreading your money around does not mean opening up a lot of different retirement accounts in different places. If you do that and then make the same kinds of investments with each of them, all you’ve done is complicate your life. Spreading your money around means building a diversified portfolio of stocks, bonds, and cash investments all done in one retirement account. Many people make this complicated. It doesn’t need to be. THE POWER OF THE PYRAMID On this page is a wonderful tool designed to help you determine where your money should be invested and how much should go in each place.

As of 2015, according to Morningstar, there are $763 billion invested in these funds. What target dated funds do is help you select an investment fund of funds that will be professionally managed with a “target date of retirement.” Say you want to retire around 2035; you simply select the fund with “2035” in it. Then the fund manager builds a diversified portfolio like the investment pyramid I showed you earlier, broken down between stocks, bonds, cash, global investments, etc. The fund then is automatically rebalanced and the risk is reduced in the portfolio as you get closer to retirement. GET TO KNOW YOUR GLIDE PATH If you already have this type of fund or you’re considering it, it’s critical that you take a look at what is called the “Glide Path” of the fund.

And the fact is that boring works—according to Morningstar, there’s now more than $650 billion invested in these simple one-stop solution target-dated funds. If you invest your money according to the Automatic Millionaire Investment Pyramid, as I suggest on this page, you will end up with a well-diversified portfolio that is professionally managed. Even better, if you invest in one balanced fund or asset allocation fund that diversifies your portfolio for you AND you automate your contributions—which, after all, is the point of this little book—you’ll have a really boring financial life. The same is true if you use a robo advisory firm or a model portfolio of index funds and ETFs.


pages: 415 words: 125,089

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

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

As Poincare had pointed out, the behavior of a system that consists of only a few parts that interact strongly will be unpredictable. With such a system you can make a fortune or lose your shirt with one big bet. In a diversified portfolio, by contrast, some assets will be rising in price even when other assets are falling in price; at the very least, the rates of return among the assets will differ. The use of diversification to reduce volatility appeals to everyone's natural risk-averse preference for certain rather than uncertain outcomes. Most investors choose the lower expected return on a diversified portfolio instead of betting the ranch, even when the riskier bet might have a chance of generating a larger payoff-if it pans out.

Improving economic status and opportunity ... is a basic component of increasing freedom. `9 But the fear of loss sometimes constrains our choices. That is why Arrow applauds insurance and risk-sharing devices like commodity futures contracts and public markets for stocks and bonds. Such facilities encourage investors to hold diversified portfolios instead of putting all their eggs in one basket. Arrow warns, however, that a society in which no one fears the consequences of risk-taking may provide fertile ground for antisocial behavior. For example, the availability of deposit insurance to the depositors of savings and loan associations in the 1980s gave the owners a chance to win big if things went right and to lose little if things went wrong.

Playing to win against such an opponent is likely to be a sure recipe for losing. By making the best of a bad bargain-by diversifying instead of striving to make a killing-the investor at least maximizes the probability of survival. The mathematics of diversification helps to explain its attraction. While the return on a diversified portfolio will be equal to the average of the rates of return on its individual holdings, its volatility will be less than the average volatility of its individual holdings. This means that diversification is a kind of free lunch at which you can combine a group of risky securities with high expected returns into a relatively low-risk portfolio, so long as you minimize the covariances, or correlations, among the returns of the individual securities.


pages: 1,544 words: 391,691

Corporate Finance: Theory and Practice by Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann le Fur, Antonio Salvi

"Friedman doctrine" OR "shareholder theory", accelerated depreciation, accounting loophole / creative accounting, active measures, activist fund / activist shareholder / activist investor, AOL-Time Warner, ASML, asset light, bank run, barriers to entry, Basel III, Bear Stearns, Benoit Mandelbrot, bitcoin, Black Swan, Black-Scholes formula, blockchain, book value, business climate, business cycle, buy and hold, buy low sell high, capital asset pricing model, carried interest, collective bargaining, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, currency risk, delta neutral, dematerialisation, discounted cash flows, discrete time, disintermediation, diversification, diversified portfolio, Dutch auction, electricity market, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, fixed income, Flash crash, foreign exchange controls, German hyperinflation, Glass-Steagall Act, high net worth, impact investing, implied volatility, information asymmetry, intangible asset, interest rate swap, Internet of things, inventory management, invisible hand, joint-stock company, joint-stock limited liability company, junk bonds, Kickstarter, lateral thinking, London Interbank Offered Rate, low interest rates, mandelbrot fractal, margin call, means of production, money market fund, moral hazard, Myron Scholes, new economy, New Journalism, Northern Rock, performance metric, Potemkin village, quantitative trading / quantitative finance, random walk, Right to Buy, risk free rate, risk/return, shareholder value, short selling, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, stocks for the long run, supply-chain management, survivorship bias, The Myth of the Rational Market, time value of money, too big to fail, transaction costs, value at risk, vertical integration, volatility arbitrage, volatility smile, yield curve, zero-coupon bond, zero-sum game

Remember that this approach applies only if the investor owns a perfectly diversified portfolio. Here is why: the greater the risk assumed by the financial investor, the higher his required rate of return. However, if he makes just one investment and that turns out to be a failure, his required rate of return will matter little, as he will have lost everything. With this in mind, it is easier to understand that the risk premium is relevant only if the financial investor manages not just a single investment, but a diversified portfolio of investments. In this case, the failure of one investment should be offset by the return achieved by other investments, which should thereby produce a suitable return for the portfolio as a whole.

Better to let a troubled sector rid itself of its lame ducks than to keep them artificially afloat, which in turn creates difficulties for the healthy, efficient firms to the point where they, too, may become financially distressed. For investors with a well-diversified portfolio, the cost of the bankruptcy will theoretically be nil, since when a company is discontinued, its assets (market share, customers, factories, etc.) are taken over by others who will manage them better. One person’s loss is another person’s gain! If the investor has a diversified portfolio, the capital losses will be offset by other capital gains. In practice, however, markets are not perfect and we all know that even if bankruptcies are a means of reallocating resources, they carry a very real cost to those involved.

Providing part of the financing and providing security to lenders. No, no and no! You forget to take into account the risk (here liquidity risk). “You can’t make money without borrowing money” applies to an investor with a poorly diversified portfolio; it’s all or nothing if he goes into debt to leverage it. “Borrowing can’t create value” applies to a perfectly diversified portfolio. Short-term, so as to be able to refinance on better terms as growth opportunities become profitable investments. Inventory profits and opportunity profits on investment realised sooner than expected. Provided the inflation rate is higher than the interest rate.


pages: 239 words: 60,065

Retire Before Mom and Dad by Rob Berger

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

They didn’t really know what they were doing and why, so they had no confidence that they were making the right decision. As you might expect, eventually they failed to press the button and…well, I won’t spoil the show for you. Investing is similar to pressing the button. It is incredibly easy. As you’ll see in later chapters, you can create a well-diversified portfolio of stocks and bonds in about the time it takes to, well, press a button. If you don’t know why you are pressing the button, however, you’ll have no confidence in what you are doing. You’ll be like the Lost survivors debating what to do. During times when market values are falling, and they will fall, your lack of knowledge could cause you to make some serious mistakes.

These companies typically grow at a slower pace than the typical company. The fund seeks to track a value-style index of small-sized companies. One of the fund’s primary risks is its focus on the small-cap arena, which is an often-volatile segment of the market. Investors looking to add a passively managed, small-cap value allocation to an already diversified portfolio may wish to consider this fund.” Given what we’ve already covered, you should follow this description like a pro. Specialty Some mutual funds invest in specific assets or industries. Two important examples of specialty funds are REITs and Commodity funds. A REIT, or Real Estate Investment Trust, is a mutual fund that invests in real estate.

He’ll also help you with everything from a budget to retirement projections to insurance to social security. You can get more information on PlanVision here: https://planvisionmn.com/. Robo-Advisors: As we discussed earlier, services such as Betterment offer low cost tools to help you build a solid portfolio. They use automation to help investors build low-cost, diversified portfolios using index ETFs (an ETF is similar to a mutual fund, but it trades like a stock). The typical fee is about 25 to 35 basis points. Some services also provide an advisor you can talk to about your portfolio, although in that case the fee will likely be higher. 3 Key Concepts The best option is to handle your own investments.


pages: 337 words: 96,666

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

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

Portfolio Design Strategies With the discussion of risks and asset classes out of the way, the final phase of safeguarding wealth is to construct a robust, diversified portfolio that will stand the test of time. The right approach to this problem depends on many factors, including the size of your rainy-day fund, prevailing market conditions, and your familiarity with each of the aforementioned asset classes (heeding the Mr. Market parable from Graham’s book). In normal inflationary environments, a solid starting point may be to keep around three to four months’ worth of savings in cash or in the bank, and then start putting what’s left in a diversified portfolio of around 10 to 20 value stocks, but only up until the equity positions represent about 50 percent of your total emergency funds.

Cryptocurrencies and NFTs There’s a reason the traditional classes of assets outlined earlier in the chapter are considered the benchmarks for investors: they’re more accessible, safer, cheaper, and more reliable than most alternatives. But there’s no shortage of more exotic choices, and at least two of them deserve some note. The first are cryptocurrencies. We discussed their mechanics before, but the lingering question is whether they have a place in a diversified portfolio. Although some financial advisors are beginning to change their tune, to me, the answer continues to be no. It’s not that cryptocurrencies lack merit or are bound to crash; it’s that their risk profile is difficult to reason about, and the staying power of specific products is far less certain than for many other instruments with good inflation-hedging properties.

., 196 currencies, history of, 58–68 customer data, 110 cuts, 150 Cypriot debt crisis, 69, 73 D data brokers, 110 Datrex, 143 d-CON, 177 DDT (dichlorodiphenyltrichloroethane), 176 De Waal, Frans, 20 death causes of, 13 planning, 14–15, 124–125 debt, 10–11, 50, 53–54, 59–60 debt crisis, 22 Debt: The First 5000 Years (Graeber), 59 de-escalation skills, 13 defensive driving, 96–98 dehydration, 134 DeleteMe Help Center, 110 deltamethrin, 176 dental care, 151 dental picks, 151 developing countries, 33–34 dextromethorphan, 150 diarrhea, 150 dichlorodiphenyltrichloroethane (DDT), 176 Didion, Joan, 122 dietary supplements, 180 diets, 115–118 digital communications, 188–189 Digital Mobile Radio (DMR), 188 diindolylmethane (DIM), 179 dinosaurs, 34 diseases, 32–33, 173–177 dishwashing, 148 Diversey Oxivir Five 16, 176 Diversey PERdiem, 148 diversified portfolios, 88–-90 divorce, 69–70 documents, 166–167 Dogecoin, 68 dogs as burglary deterrent, 112 domestic terrorism, 26–27 driving habits, 96–98 drowning, 104 drugs, 99–101, 150 D-STAR, 188 “duck and cover,” 39 DuPont Tychem coveralls, 175 dust storms, 18 duty to retreat, 205 Dynarex, 149 E earthquake probabilities, 19 Ebola, 26, 32 economic crises, 22–24 economic hardships, 10–11 economic persecution, 72 ecosystem collapse, 34 Ehrlich, Paul R., 7–8, 30 elastic bandages, 150 electricity, 36, 152–159 electrolyte imbalance, 150 emergency ration bars, 143 emergency repairs, 162–163 EMP (electromagnetic pulse), 40–41 employment, 91–93 encephalitis lethargica, 25 Energizer Ultimate batteries, 155 entertainment, 191–192 epinephrine inhalers, 150 Epsilon Data Management, 110 Equifax, 110 equities, 79–81 escheatment, 77 eugenics, 37 eugenol, 151 evacuation, 165–171 exercise, 117–118 expenses, 51–52 Experian, 110 Expose, 176 extinction, 34 extraterrestrial life, 43 extreme weather, 18, 156–158, 168 F Facebook, 109, 110, 155 fall injuries, 98–99 false vacuum decay, 35 Family Radio Service (FRS), 186–187 farming, 137 Federal Emergency Management Agency (FEMA), 19, 132 fever, 150 fiat money, 64–65 fiction, 29–30 fighting, 113, 206 financial problems, 10–11 firearms, 196–197, 211–219 fires Butte fire complex, 18 house fires, 11, 18, 103–104 wildfires, 18, 44, 124 firewood, 158, 170 first aid, 149–152 fitness, 115–118 fixed-blade knives, 170 flashlights, 154–155 flat tires, 163 floods, 19, 147–148 floss, 151 flu, 25 fluticasone propionate, 150 FMJ (full metal jacket) bullets, 217 food-borne illness, 141–142 food preparation, 158 food security, 137–144 foraging, 168–169 foreclosures, 10–11 foreign currencies, 78–79 Forgey, William W., 152 Forster, E.


pages: 239 words: 69,496

The Wisdom of Finance: Discovering Humanity in the World of Risk and Return by Mihir Desai

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, AOL-Time Warner, assortative mating, Benoit Mandelbrot, book value, Brownian motion, capital asset pricing model, Carl Icahn, carried interest, Charles Lindbergh, collective bargaining, corporate governance, corporate raider, discounted cash flows, diversified portfolio, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, follow your passion, George Akerlof, Gordon Gekko, greed is good, housing crisis, income inequality, information asymmetry, Isaac Newton, Jony Ive, Kenneth Rogoff, longitudinal study, Louis Bachelier, low interest rates, Monty Hall problem, moral hazard, Myron Scholes, new economy, out of africa, Paul Samuelson, Pierre-Simon Laplace, principal–agent problem, Ralph Waldo Emerson, random walk, risk/return, Robert Shiller, Ronald Coase, short squeeze, Silicon Valley, Steve Jobs, Thales and the olive presses, Thales of Miletus, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, tontine, transaction costs, vertical integration, zero-sum game

Myron Scholes and Robert Merton would win the Nobel Prize in 1997 for a pricing formula that corresponds to (and considerably improves upon) the mostly forgotten logic laid down by Bachelier. And Bachelier’s ability to describe stock prices moving about at random ultimately gave rise to portfolio theory by putting forward the notion that it was hopeless to try to beat the market—the best you could do was hold a diversified portfolio. Perhaps it’s wrong to mock the history of French finance as much as I did in the last chapter. Yes, French public finance schemes were inherently unstable and impractical compared to the English system. But we can thank Parisian financial markets for providing the insights that gave rise to the modern understanding of risk management.

In fact, the relationships that are most enriching are ones that broaden our perspective beyond our usual experience—those relationships are, in finance terms, “imperfectly correlated assets,” precisely the types of assets that most enhance the portfolios of our lives. Similarly, filling our lives with only those people who think like we do and who experience the same world that we inhabit is not nearly as powerful. Just as Keynes found it hard to intuit diversification, the logic of a diversified portfolio of relationships runs counter to many of our instincts. Homophily, or the desire to surround ourselves with like-minded people, is a common social instinct—and one that finance warns against. Yes, it’s easier to be around like-minded types, but finance recommends the hard work of exposing yourself to differences, not shielding yourself from them.

The gist of that model is that—given the virtues of diversification—individuals will hold many different investments and, consequently, every investment will be measured on the basis of how different or similar they are to the rest of that portfolio. In short, the risk of any investment can’t be measured in isolation—the risk of an asset can only be measured by understanding how it behaves relative to a diversified portfolio and how it contributes to that portfolio. So, here’s what that model boils down to: assets that fluctuate very much along with your portfolio are “high-beta” assets that are not highly valued because of their limited diversification value. In fact, they make your exposure to the market even more pronounced—when the market goes down, these stocks go down a lot.


pages: 139 words: 33,246

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

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

Index funds basically deliver the returns of the overall stockmarket, but at much lower costs than funds managed by clever people who try to outperform the market. Jack Bogle is the founder of Vanguard, which with around £3 trillion is the second-largest mutual fund manager in the world. This is what he has to say about investing: ‘The index fund is a most unlikely hero for the typical investor. It is no more (nor less) than a broadly diversified portfolio, typically run at rock-bottom costs, without the putative benefit of a brilliant, resourceful, and highly skilled portfolio manager. The index fund simply buys and holds the securities in a particular index, in proportion to their weight in the index. The concept is simplicity writ large.’48 So there really is no need to pay high annual charges to have your money managed by a manager who makes decisions on what companies to buy, when and how much.

However, given that each investor has their own risk preference, they can increase or decrease the equity content within their portfolio. So we end up with five no-brainer portfolios, depending on the risk the investor is prepared to take, as shown below.50 Fund groups like Vanguard with their Lifestrategy range, and Blackrock with their Consensus range, offer very low cost, globally diversified portfolios with a choice of risk and reward profiles, for an annual charge of around 0.25% per annum of the amount you invest. So, in summary, get broad stockmarket exposure that meets your risk/reward profile, keep costs low (I personally use a multi-index portfolio fund) and take a very long-term view, But I’ll leave the last word to Warren Buffett, one of the most successful investors of all time and one of the richest people in the world.


pages: 339 words: 109,331

The Clash of the Cultures by John C. Bogle

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

This chapter will likely prove contentious, for I set down my own evaluations—flawed and subjective though they may be—of what I call the “Stewardship Quotient” for Vanguard and for three other fund managers. The Index Fund In 1975, I created the first index mutual fund, now known as Vanguard 500 Index Fund. Then, as now, I considered it the very paradigm of long-term investing, a fully diversified portfolio of U.S. stocks operated at high tax efficiency and rock-bottom costs, and designed to be held, well, “forever.” It is now the world’s largest equity mutual fund. In Chapter 6, I chronicle the Fund’s formation, its investment advantages, its minimal costs, and its remarkable record of performance achievement.

It seems increasingly apparent, however, that the paradigm of long-term investing represented by the TIF and the paradigm of short-term speculation so often represented by the ETF are, in general, competing only at the margin for the capital of the same investors. The clash of the cultures in the index fund arena, then, is a clash between two very different philosophies. The first philosophy is buy and hold a widely diversified portfolio of stocks and bonds. The second is buy such a portfolio and sell at will, and do the same with narrow portfolios of, well, anything, including heavily levered portfolios through which bets are magnified. Seldom has the choice between investment and speculation been so starkly drawn. To be fair, we must make a distinction between the use of ETFs by individual investors and financial institutions.

I have earlier explored how mutual fund investors can do so more effectively by seeking out funds that already measure up to essential fiduciary principles, presenting in Chapter 5 a “stewardship quotient” checklist that investors can use to establish guidelines for their selection of a mutual fund family, and choosing among the mutual funds it supervises. Buy Broad Market Index Funds Another major positive step is focusing on index funds as the core of your portfolio. Owning an index fund is simply a decision to buy and hold a diversified portfolio of stocks representing the entire stock market, both U.S. and possibly non-U.S. companies. Such an index fund is the paradigm of long-term investing, and the antithesis of short-term speculation. That was my concept when I created the first index mutual fund way back in 1975, and the growth of indexing over the past 37 years has attested to its soundness—and then some!


pages: 319 words: 106,772

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

Alan Greenspan, Andrei Shleifer, asset allocation, banking crisis, benefit corporation, Benoit Mandelbrot, book value, business cycle, buy and hold, computer age, correlation does not imply causation, Daniel Kahneman / Amos Tversky, demographic transition, diversification, diversified portfolio, equity premium, Everybody Ought to Be Rich, experimental subject, hindsight bias, income per capita, index fund, Intergovernmental Panel on Climate Change (IPCC), Joseph Schumpeter, Long Term Capital Management, loss aversion, Mahbub ul Haq, mandelbrot fractal, market bubble, market design, market fundamentalism, Mexican peso crisis / tequila crisis, Milgram experiment, money market fund, moral hazard, new economy, open economy, pattern recognition, Phillips curve, Ponzi scheme, price anchoring, random walk, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, Small Order Execution System, spice trade, statistical model, stocks for the long run, Suez crisis 1956, survivorship bias, the market place, Tobin tax, transaction costs, tulip mania, uptick rule, urban decay, Y2K

Stefano Athanasoulis and I have proposed creating first a market for a longterm claim on the combined national incomes of all the nations of the world (“The Significance of the Market Portfolio,” forthcoming in Review of Financial Studies [2000]). By investing in it, one would have a totally diversified portfolio, the socalled true “market portfolio” that finance theorists only dream about. Younger working people and people who are less risk averse may short this market, and elderly people who are no longer working can take long positions, thereby living off a completely diversified portfolio in their retirement. 32. See Marianne Baxter and Urban Jermann, “The International Diversification Puzzle Is Worse Than You Think,” American Economic Review, 87 (1997): 170–80. 33.

Learning about Mutual Funds, Diversification, and Holding for the Long Run James Glassman and Kevin Hassett, in a pair of influential Wall Street Journal articles in 1998 and 1999, argued that “investors have become better educated about stocks, thanks in large part to mutual funds and the media. They have learned to hold for the long term and to see price declines as transitory—and as buying opportunities.” Thus, they conclude that investors have learned that diversified portfolios of stocks are not risky, that stocks are much more valuable as investments than they had formerly thought. Therefore they are now willing to pay much more for stocks. Because of this increased investor demand for stocks, the stock market will perpetually remain at a higher level in the future.11 Glassman and Hassett followed up these articles with a book, Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market.

The proposed major international markets I call macro markets would include markets for long-term claims on national incomes for each of the major countries of the world; markets for long-term claims on the incomes of specific occupational groups; and markets for currently illiquid assets, such as single-family homes.29 There are a number of ways to create macro markets, including using perpetual futures or the macro securities that Allan Weiss and I developed.30 If such markets are created, people can take short positions in them corresponding to their own incomes, to protect themselves against fluctuations in the value of their own personal sources of income, and can invest in a truly diversified portfolio around the world. These markets could indeed be vastly larger than any existing market and far more numerous in the risks they allow to be offset. Moreover, retail institutions such as home equity insurance or pension plan options that correlate negatively with labor income or home values will help people make use of such risk management tools.31 I believe that creating such new markets may have, besides their obvious benefits of creating new risk management opportunities, a salutary effect on speculative excesses by broadening the scope of market participation.


pages: 272 words: 19,172

Hedge Fund Market Wizards by Jack D. Schwager

asset-backed security, backtesting, banking crisis, barriers to entry, Bear Stearns, beat the dealer, Bernie Madoff, Black-Scholes formula, book value, British Empire, business cycle, buy and hold, buy the rumour, sell the news, Claude Shannon: information theory, clean tech, cloud computing, collateralized debt obligation, commodity trading advisor, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, diversification, diversified portfolio, do what you love, Edward Thorp, family office, financial independence, fixed income, Flash crash, global macro, hindsight bias, implied volatility, index fund, intangible asset, James Dyson, Jones Act, legacy carrier, Long Term Capital Management, managed futures, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, merger arbitrage, Michael Milken, money market fund, oil shock, pattern recognition, pets.com, Ponzi scheme, private sector deleveraging, proprietary trading, quantitative easing, quantitative trading / quantitative finance, Reminiscences of a Stock Operator, Right to Buy, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Rubik’s Cube, Savings and loan crisis, Sharpe ratio, short selling, statistical arbitrage, Steve Jobs, systematic trading, technology bubble, transaction costs, value at risk, yield curve

As part of this project, one of the researchers looked at stocks that were most up and stocks that were most down during the recent past. He found that the stocks that were most up tended to underperform the market in the next period, while the stocks that were most down tended to outperform the market. That finding led to a strategy of buying a diversified portfolio of the most down stocks and selling a diversified portfolio of the most up stocks. We called that strategy MUD for most up, most down. My friend UCI mathematician William F. Donoghue used to joke, little realizing how close he was to a deep truth, “Thorp, my advice is to buy low and sell high.” We found that this market neutral strategy had about a 20 percent annual return before costs.

He states that return/risk can be improved by as much as a factor of 5 to 1 if the assets in the portfolio are truly independent. Most people tend to focus on correlation as a primary tool for determining the relative dependence or independence of two assets. Dalio believes that correlation can be a misleading statistic and poorly suited as a tool for constructing a diversified portfolio. The crux of the problem is that correlations between assets are highly variable and critically dependent on prevailing circumstances. For example, typically, gold and bonds are inversely related because inflation (current or expected) will be bullish for gold and negative for bonds (because higher inflation normally implies higher interest rates).

In this type of environment, gold and bonds can be positively correlated, which is exactly opposite their normal relationship. Instead of using correlation as a measure of dependence between positions, Dalio focuses on the underlying drivers that are expected to affect those positions. Drivers are the cause; correlations are the consequence. In order to ensure a diversified portfolio, it is necessary to select assets that have different drivers. By determining the future drivers that are likely to impact each market, a forward-looking approach, Dalio can more accurately assess which positions are likely to move in the same direction or inversely—for example, anticipate when gold and bonds are likely to move in the same direction and when they are likely to move in opposite directions.


pages: 467 words: 154,960

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

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

., a trend following managed futures firm with almost $3 billion in assets under management, has returned 17.65 percent since its inception in 1972, proving that performance can be sustainable over the long-term.26 The Millburn Diversified Portfolio has a 10 percent allocation which has historically exhibited superior performance characteristics coupled with an almost zero correlation of monthly returns to those of traditional investments. If an investor had invested 10 percent of his or her portfolio in the Millburn Diversified Portfolio from February 1977 through August 2003 he or she would have increased the return on his or her traditional portfolio by 73 basis points (a 6.2 percent increase) and decreased risk (as measured by standard deviation) by 0.26 of a percent (an 8.2 percent decrease). www.millburncorp.com 112 Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets among trend followers.

Will you trade stocks? Currencies? Futures? Commodities? What markets will you choose? While some people might focus on limited, market-specific portfolios, such as currencies or bonds, others pursue a more widely diversified portfolio of markets. For example, The Adam, Harding, & Lueck (AHL) Diversified Program (the largest trend following fund in the world now run by Man Financial) trades a diversified portfolio of over 100 core markets on 36 exchanges. They trade stock indices, bonds, currencies, shortterm interest rates, and commodities (energy, metal, and agricultural contracts): CHART 10.1: AHL Portfolio Currencies: 24.3% Bonds: 19.8% Energies: 19.2% Stocks: 15.1% Interest rates: 8.5% Metals: 8.2% Agriculturals: 4.9% AHL does not have fundamental expertise in all of these markets.

Portfolio heat seems to be associated with personality preference; bold traders prefer and are able to take more heat, while more conservative traders generally avoid the circumstances that give rise to heat. In portfolio management, we call the distributed bet size the heat of the portfolio. A diversified portfolio risking 2 percent on each of five instruments has a total heat of 10 percent, as does a portfolio risking 5 percent on each of two instruments.”16 Chauncy DiLaura, a student of Seykota’s, adds to the explanation, “There has to be some governor so I don’t end up with a whole lot of risk. The size of the bet is small around 2 percent.”


pages: 244 words: 79,044

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

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

There is more money to be made from active management or convincing people to invest in more fancy products like hedge funds or private equity. The above is highly unsexy as it does not claim to be able to beat the market or be particularly brilliant at financial analysis. Buying protection? The main concern with a broadly diversified portfolio is that diversification can give a false sense of security. When the shit hits the fan, all markets act as one and our fancy charts go out the window, along with correlation assumptions. During the 2008 meltdown, no markets were spared, just as in September 2001 when they all took a hit at the same time.

Above that implied volatility threshold the options were simply too expensive for it to be a consistently profitable strategy. There is probably an argument to be made that investors who are comfortable trading options could benefit from buying deep out-of-the-money put options on the market when implied volatilities are low and thus be protected against shock events in their diversified portfolio at a manageable cost, but it is clearly not a strategy for everyone. In summary, for those without edge (and that would be most people) we probably have to accept that most our financial investments will correlate in a downturn and we should adjust our risk appetite accordingly. Summary If we have only bought general indices on stocks and bonds, we have not paid anyone a ton of money to be smart about beating the markets (since we don’t think it can consistently be done, after fees).

Our portfolio consists of a series of index futures, ETFs, and broad indices of corporate and government bonds. Over a five-to-ten-year time horizon, the low cost of the portfolio alone should cause us to outperform the active managers, who are weighed down both by fees and by investing in a narrower subset of the market than our broadly diversified portfolio. A few summarising thoughts: If you accept that market direction can’t be consistently predicted, you should not try to do so or pay anyone a lot of money for trying to do this on your behalf. If you accept active management, you implicitly accept the corresponding high fees and expenses.


pages: 253 words: 79,214

The Money Machine: How the City Works by Philip Coggan

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

Furthermore, the best hedge funds are often closed to new investors, because the managers worry that having too big a fund will reduce performance. The new investors may end up choosing between smaller managers without a long track record. The biggest problem of all may be the costs. The managers claim superior skills, so they charge higher fees; 2 per cent annually and a fifth (20 per cent) of all returns. Those that want a diversified portfolio of managers may opt for a fund-of-hedge-funds, which will charge another 1 per cent annually (and 10 per cent of performance) on top. That is a big hurdle to overcome. Worse still, the high performance fees may encourage hedge fund managers to take risk. After all, it is the performance fees that have turned some managers into billionaires; if you manage $10 billion of money, and the fund returns 20 per cent in a year, that is a performance fee of $400 million.

There is also the possibility that the borrower will not repay the loan or bond. In the old days, there was not much that the investor could do about this. Bond investors could at least sell their holdings if they felt bad news was due; loan investors were usually stuck. The best protection was to have a diversified portfolio of bonds or loans and hope that the good payers outweighed the defaulters. But the financial markets are remarkably ingenious at finding ways to insure against risk. The credit default swap is their latest wheeze. It is like an insurance policy against default. One party pays a premium to another; in return, the seller agrees to pay up if the borrower defaults.

Most private investors only have enough money to buy two or three shares, and are thus very exposed to the risk of one of those companies going bust. Unit and investment trusts (explained in Chapter 8) offer a way round this problem. They each buy a widespread portfolio of shares – private investors then acquire units, or shares, in the trusts. Those with a small sum can thus enjoy the benefits of a diversified portfolio. It is possible to buy units in trusts which specialize in certain geographical areas (such as the US, Japan or Europe) or in commodities like gold. However, the more narrow a trust’s focus, the greater the risk. Investment trusts have shares rather than units. These shares are not directly linked to the value of the fund, but rise and fall according to supply and demand.


pages: 185 words: 43,609

Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel, Blake Masters

Airbnb, Alan Greenspan, Albert Einstein, Andrew Wiles, Andy Kessler, Berlin Wall, clean tech, cloud computing, crony capitalism, discounted cash flows, diversified portfolio, do well by doing good, don't be evil, Elon Musk, eurozone crisis, Fairchild Semiconductor, heat death of the universe, income inequality, Jeff Bezos, Larry Ellison, Lean Startup, life extension, lone genius, Long Term Capital Management, Lyft, Marc Andreessen, Mark Zuckerberg, Max Levchin, minimum viable product, Nate Silver, Network effects, new economy, Nick Bostrom, PalmPilot, paypal mafia, Peter Thiel, pets.com, power law, profit motive, Ralph Waldo Emerson, Ray Kurzweil, self-driving car, shareholder value, Sheryl Sandberg, Silicon Valley, Silicon Valley startup, Singularitarianism, software is eating the world, Solyndra, Steve Jobs, strong AI, Suez canal 1869, tech worker, Ted Kaczynski, Tesla Model S, uber lyft, Vilfredo Pareto, working poor

They know companies are different, but they underestimate the degree of difference. The error lies in expecting that venture returns will be normally distributed: that is, bad companies will fail, mediocre ones will stay flat, and good ones will return 2x or even 4x. Assuming this bland pattern, investors assemble a diversified portfolio and hope that winners counterbalance losers. But this “spray and pray” approach usually produces an entire portfolio of flops, with no hits at all. This is because venture returns don’t follow a normal distribution overall. Rather, they follow a power law: a small handful of companies radically outperform all others.

Therefore every entrepreneur must think about whether her company is going to succeed and become valuable. Every individual is unavoidably an investor, too. When you choose a career, you act on your belief that the kind of work you do will be valuable decades from now. The most common answer to the question of future value is a diversified portfolio: “Don’t put all your eggs in one basket,” everyone has been told. As we said, even the best venture investors have a portfolio, but investors who understand the power law make as few investments as possible. The kind of portfolio thinking embraced by both folk wisdom and financial convention, by contrast, regards diversified betting as a source of strength.


pages: 287 words: 81,970

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

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

If you spend a lot of time behind the wheel and your cost of living will rise sharply as energy prices climb, you may want to hedge that risk by allocating more to the energy component of your portfolio. Someone with a small amount of money may invest the entire amount in gold coins, while an experienced investor with an already diversified portfolio will act on one or two specific recommendations that represent special profit opportunities. Even so, I do recommend that you allot your investments among the four categories to the extent you are able. The four categories represent investments in enduring monetary vehicles (although gold and silver each merit a separate chapter, think of them both as part of this category), in the world’s preeminent form of energy, in the basics of life, and in financial conditions that unfold over time.

Read the prospectus, available at the same site, unitedstatesoilfund.com, before investing. Because of the political risk it is hard to recommend direct oil investments in much of the world now. Direct investments in kleptocracies like Mexico and Russia are out of the question except as small parts of well-diversified portfolios. Canada is another story. Canada is a rule-of-law nation that operates a fiscal surplus and a balance of trade surplus. It has the world’s second-largest proved reserves and is the United States’ largest supplier of oil. Canadian Royalty Trusts oil and natural gas producers deserve a mention in this section because of their advantageous structure.

Baytex Energy Trust (Toronto Stock Exchange symbol: BTE.UN; New York Stock Exchange symbol: BTE), an oil and gas investment trust with producing properties in Alberta, British Columbia, and Saskatchewan, produces over 40,000 barrels of oil equivalent per day, weighted about 60 percent to heavy oil. Consult the company’s Web site before investing, baytex.ab.ca, for regulatory filings and more information. Enerplus Resources Fund Trust (Toronto Stock Exchange symbol: ERF.UN; New York Stock Exchange symbol: ERF) is an oil and gas income trust with a diversified portfolio of crude oil and natural gas assets located in western Canada and the United States. Production expectations for 2009 are 91,000 barrels of oil equivalent a day: 58 percent natural gas, 42 percent crude oil and natural gas liquids. Read investor information and regulatory filings before investing at enerplus. com.


pages: 219 words: 15,438

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

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

According to this view, you will do 12 CARDOZO LAW REVIEW [Vol. 19:1 better by randomly selecting a group of stocks for a portfolio by throwing darts at the stock tables than by thinking about whether individual investment opportunities make sense. One of modern finance theory's main tenets is modern portfolio theory. It says that you can eliminate the peculiar risk of any security by holding a diversified portfolio-that is, it formalizes the folk slogan "don't put all your eggs in one basket." The risk that is left over is the only risk for which investors will be compensated, the story goes. This leftover risk can be measured by a simple mathematical term-called beta-that shows how volatile the security is compared to the market.

A strategy of financial and mental concentration may reduce risk by raising both the intensity of an investor's thinking about a business and the comfort level he must have with its fundamental characteristics before buying it. The fashion of beta, according to Buffett, suffers from inattention to "a fundamental principle: It is better to be approximately right than precisely wrong." Long-term investment success depends not on studying betas and maintaining a diversified portfolio, but on recognizing that as an investor, one is the owner of a business. Reconfiguring a portfolio by buying and selling stocks to accommodate the desired beta-risk profile defeats long-term investment success. Such "flitting from flower to flower" imposes huge transaction costs in the forms of spreads, fees and commissions, not to mention taxes.

When these misdeeds were done, however, dagger-selling investment bankers pointed to the "scholarly" research of academics, which reported that over the years the higher interest rates received from low-grade bonds had more than compensated for their higher rate of default. Thus, said the friendly salesmen, a diversified portfolio of junk bonds would produce greater net returns than would a portfolio of high~grade bonds. (Beware of past-performance "proofs" in finance: If history books were the key to riches, the Forbes 400 would consist of librarians.) There was a flaw in the salesmen's logic-one that a first-year student in statistics is taught to recognize.


pages: 478 words: 126,416

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

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

The CAPM describes them as specific risk and market risk respectively. Specific risk arises when a badly managed business loses share to its competitors, or a major project suffers from cost overruns. A well-diversified portfolio will accumulate a variety of specific risks. (CAPM implies that the lower risk achieved by constructing such a portfolio will be reflected in lower returns: I recommend readers to ignore this advice and build a diversified portfolio anyway.) Market risk is usually measured by β, which measures the correlation between the value of a particular stock and the movement of general share price indexes. I will return to this Greek alphabet soup in Chapter 7.

For example, the risk that interest rates will rise sharply is unrelated to the risk that a cancer drug will fail its clinical trials, or the risk that Apple’s new product range will flop. A conservative investor – like me – can invest in very risky things so long as the investment is part of a well-diversified portfolio. Correlation is the statistical term for the extent to which two distinct variables – such as the values of Apple shares and those of long-term bonds – move together. Understanding correlation, and judging it, is critical to effective portfolio management by intermediaries. A fairly small number of securities is enough to provide effective diversification if the risks those securities carry are completely different.

Taken as a whole, although some particular hedge funds have been very successful, the hedge fund industry has been very profitable for hedge fund managers, but not for their investors.8 Diversification by financial intermediaries is nevertheless valuable and cheaper for investors. This was the initially persuasive rationale for pooled investment funds, which enabled small investors to take shares in a diversified fund which they could not possibly have built for themselves. A simple, lazy and therefore inexpensive way of constructing a diversified portfolio is simply to buy all the available stocks. In the 1970s computers made it easy for intermediaries to offer funds that held a proportionate share of every security. Academic research around the efficient market hypothesis – which encouraged scepticism about the reality of manager skill – led to the creation of the first index, or passive, funds.


pages: 320 words: 33,385

Market Risk Analysis, Quantitative Methods in Finance by Carol Alexander

asset allocation, backtesting, barriers to entry, Brownian motion, capital asset pricing model, constrained optimization, credit crunch, Credit Default Swap, discounted cash flows, discrete time, diversification, diversified portfolio, en.wikipedia.org, financial engineering, fixed income, implied volatility, interest rate swap, low interest rates, market friction, market microstructure, p-value, performance metric, power law, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, seminal paper, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic bias, Thomas Bayes, transaction costs, two and twenty, value at risk, volatility smile, Wiener process, yield curve, zero-sum game

To derive the CAPM, we consider the conditions under which a risky asset may be added to an already well diversified portfolio. The conditions depend on the systematic risk of the asset, also called the undiversifiable risk of the asset since it cannot be diversified away by holding a large portfolio of different risky assets. We also need to know the risk free rate of return and the expected return on the market portfolio. Then we ask: given the systematic risk of an asset, what should its expected excess return be to justify its addition to our well diversified portfolio?21 The CAPM is based on a concept of market equilibrium in which the expected excess return on any single risky asset is proportional to the expected excess return on the market portfolio.

So if an estimated coefficient is insignificantly different from 0 then its explanatory variable can be excluded from the regression model. The estimated model can be used to: • predict or forecast values of the dependent variable using scenarios on the independent variables; • test an economic or financial theory; • estimate the quantities of financial assets to buy or sell when forming a diversified portfolio, a hedged portfolio or when implementing a trading strategy. The outline of this chapter is as follows. Section I.4.2 introduces the simplest possible linear regression model, i.e. one with just one explanatory variable. We describe the best method to estimate the model parameters when certain assumptions hold.

It is the excess of the expected return on an asset (or more generally on an investment portfolio) over the risk free rate divided by the standard deviation of the asset returns distribution, i.e. ER − Rf (I.6.56) = where ER and are the forecasted expected return and standard deviation of the asset or portfolio’s returns. Suppose we forecast an alpha for a risky asset in the CAPM framework (I.6.47) and that this alpha is positive. Then we may wish to add this asset to our well diversified portfolio, but the CAPM does not tell us how much of this asset we should buy. If our holding is too large this will affect the diversification of our portfolio. The asset has a non-zero specific risk , so if we add too much of the asset this will produce a specific risk of the portfolio that is also non-zero.


pages: 471 words: 124,585

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

Admiral Zheng, Alan Greenspan, An Inconvenient Truth, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Bear Stearns, Black Monday: stock market crash in 1987, 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, classic study, 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, equity risk premium, financial engineering, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, Future Shock, German hyperinflation, Greenspan put, Herman Kahn, 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, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, Nelson Mandela, Nick Bostrom, 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, risk free rate, Robert Shiller, rolling blackouts, Ronald Reagan, Savings and loan crisis, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, subprime mortgage crisis, tail risk, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, tontine, too big to fail, transaction costs, two and twenty, undersea cable, value at risk, W. E. B. Du Bois, Washington Consensus, Yom Kippur War

But the real home bias is the tendency to invest nearly all our wealth in our own homes. Housing, after all, represents two thirds of the typical US household’s portfolio, and a higher proportion in other countries.75 From Buckinghamshire to Bolivia, the key to financial security should be a properly diversified portfolio of assets. 76 To acquire that we are well advised to borrow in anticipation of future earnings. But we should not be lured into staking everything on a highly leveraged play on the far from risk-free property market. There has to be a sustainable spread between borrowing costs and returns on investment, and a sustainable balance between debt and income.

For one thing, they were simultaneously pursuing multiple, uncorrelated trading strategies: around a hundred of them, with a total of 7,600 different positions.82 One might go wrong, or even two. But all these different bets just could not go wrong simultaneously. That was the beauty of a diversified portfolio - another key insight of modern financial theory, which had been formalized by Harry M. Markowitz, a Chicago-trained economist at the Rand Corporation, in the early 1950s, and further developed in William Sharpe’s Capital Asset Pricing Model (CAPM).83 Long-Term made money by exploiting price discrepancies in multiple markets: in the fixed-rate residential mortgage market; in the US, Japanese and European government bond markets; in the more complex market for interest rate swapsbf - anywhere, in fact, where their models spotted a pricing anomaly, whereby two fundamentally identical assets or options had fractionally different prices.

advertising 196 Afghanistan 6 Africa: aid to 307 British investment in 293 China and 338-9 gold trade 25 slaves from 23 African-American people 249-50 ‘Africas within’ 13 age see pensions agriculture: East-West comparison 285 finance and 2 forward and future contracts 226 ‘improvements’ 235 and migration 110 rising and declining prices 53 and risk 184 Agtmael, Antoine van 288 Aguilera, Jaime Roldós 310-11 aid: conditions on 307 limited usefulness 307 and microfinance 279 to developing countries 274 Aldrich-Vreeland Act 301 Algeria 32 Allende, Salvador 212-13 Allison, Graham 223 All State insurance company 181-2 Al Qaeda 223 Alsace 144 Amboyna 130 American Civil War 91-7 American Dream Downpayment Act 267 American Home Mortgage 272 Americas, conquest of 285 Amsterdam 127 as financial centre 74-5 Amsterdam Exchange Bank (Wisselbank) 48-9 anarchists 17 Andersen (Arthur) 173 Andhra Pradesh 280 Angell, Norman 297 Angola 2 annuities 73-4 anthrax 223 anti-Darwinians 356 Antipodes 293 anti-Semitism 38 Antwerp 52 Applegarth, Adam 7 Arab: mathematics 32 oil 26 Arab-Israeli war 308 arbitrage 83 Argentina 98 British investment in 294 currencies 114 default crisis 110 Enron and 171 inflation 3 past prosperity 3 stock market 125 aristocracy 89 ARMs see mortgages, adjustable-rate arms/defence industry 298 . see also technological innovation art markets 6 Asia: aid and international investment 287 Asian crisis (1997-8) 10 and credit crunch 283 dependence on exports to US 10 dollar pegs 300 European trade 26 industrial growth and commodity prices 10 low-wage economies, production by 116 savings glut 336 sovereign wealth funds 9 asset-backed securities 6 and sub-prime mortgages 9 assets: asset markets 163 need for diversified portfolio 262 new types 353 asymmetric information 122 Atahuallpa 20 Australasia 52 Australia 233 Austria/Austro-Hungarian empire 90 bonds 86 currency collapses 107 and First World War 101 autarky 303 automobiles 160 Avignon 43 Babylonia see Mesopotamia Baer (Julius) bank 322 Bagehot, Walter 55 Baghdad 176 Bahamas see Lyford Cay Bailey, A.


pages: 504 words: 139,137

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

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

When a merger has been announced, the target stock jumps up on the announcement, but if the merger deal falls apart, the price will drop back down. Due to this event risk, many mutual funds and other investors sell the target stock, leading to downward pressure on the stock price. In this case, merger arbitrage hedge funds provide liquidity by buying a diversified portfolio of such merger targets. The merger arbitrage hedge funds can therefore be viewed as selling insurance against the event risk that the merger falls apart. Just as insurance companies profit from selling protection against your house burning down, merger arbitrage hedge funds profit from selling insurance against a merger deal failing.

The standard return-based measure is the market beta, measuring the systematic risk that the stock price will go down when the market is also down. Some equity investors also look at a stock’s total volatility (or even its idiosyncratic volatility). The beta is relevant for measuring the contribution to risk in a very well-diversified portfolio, while the stock’s total volatility is the risk of holding the stock in a concentrated portfolio. Fundamental risk measures are designed to estimate the risk of declining future profits, for instance, by considering the past variation in profitability. Payout and Management Quality A fourth class of quality measures focuses on how shareholder-friendly the firm is and how well managed it is.

The size of each position is chosen to target an annualized volatility of 40% for that asset.6 Specifically, the number of dollars bought/sold of instrument s at time t is 40%/ so that the time series momentum (TSMOM) strategy realizes the following return during the next week: Here, is the ex ante annualized volatility for each instrument, estimated as an exponentially weighted average of past squared returns. This constant-volatility position-sizing methodology is useful for several reasons: First, it enables us to aggregate the different assets into a diversified portfolio that is not overly dependent on the riskier assets—this is important given the large dispersion in volatility among the assets we trade. Second, this methodology keeps the risk of each asset stable over time, so that the strategy’s performance is not overly dependent on what happens during times of high risk.


pages: 369 words: 128,349

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

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

The foregoing discussion assumes that a valid explanation exists for each anomaly. That is not always the case. There are anomalies, such as the home bias, for which no reasonable explanation exists. Home bias is the tendency of investors to underweight foreign stocks compared to an optimally diversified portfolio. In other cases, the explanation, though supported by empirical evidence, may be incorrect. Whenever explanations are either false or unavailable, the anomaly is likely to disappear without any warning. ANOMALIES MAY BE ARBITRAGED AWAY BY TRADING If markets are efficient and investors are rational, then the more popular this book becomes, the greater the chance that people will trade on these anomalies until they are no longer profitable.

A simple and commonly used measure of the riskreturn trade-off is the Sharpe ratio.2 The ratio is calculated as: 81 82 Beyond the Random Walk Portfolio return – Return on Treasury bills Standard deviation of portfolio return The Sharpe ratios are reported below based on the average shortterm interest rate and annual returns for two trading strategies and three indexes over the May 1989–April 1999 period. 6-month estimation period, 12-month holding, 3 industries 0.58 12-month estimation period, 12-month holding, 3 industries 0.86 S&P 500 holding return 0.86 Wilshire 5000 holding return 0.78 Russell 2000 holding return 0.35 Sector fund trading strategies do not outperform the S&P 500 after accounting for risk. However, the trading strategies are generally superior when compared with other mutual funds, and other indexes. If only the beta risk (or systematic risk) is considered (assuming the sector funds are held in an otherwise well-diversified portfolio), the sector fund trading strategies are superior, in general, to almost all other mutual funds, including the S&P 500 index funds. All of the data presented in this section for Fidelity sector funds are based on long holding periods. Later in this chapter we will see that Fidelity sector funds perform quite well over shorter holding periods.

However, if you own only one stock, such as the stock of the company you work for, it is easy to find other stocks that are not well correlated with that stock. Adding more stocks to that one stock will certainly reduce risk. It is estimated that you must invest in thirty to forty randomly picked stocks to get a reasonably diversified portfolio. Did you know that a typical individual invests in less than ten stocks? How many different stocks does your portfolio have? Correlation and risk are important for all financial decisions. For example, you protect your house and car against loss through insurance. Insurance has a negative correlation with your assets.


pages: 469 words: 132,438

Taming the Sun: Innovations to Harness Solar Energy and Power the Planet by Varun Sivaram

"World Economic Forum" Davos, accelerated depreciation, addicted to oil, Albert Einstein, An Inconvenient Truth, asset light, asset-backed security, autonomous vehicles, bitcoin, blockchain, carbon footprint, carbon tax, clean tech, collateralized debt obligation, Colonization of Mars, currency risk, decarbonisation, deep learning, demand response, disruptive innovation, distributed generation, diversified portfolio, Donald Trump, electricity market, Elon Musk, energy security, energy transition, financial engineering, financial innovation, fixed income, gigafactory, global supply chain, global village, Google Earth, hive mind, hydrogen economy, index fund, Indoor air pollution, Intergovernmental Panel on Climate Change (IPCC), Internet of things, low interest rates, M-Pesa, market clearing, market design, Masayoshi Son, mass immigration, megacity, Michael Shellenberger, mobile money, Negawatt, ocean acidification, off grid, off-the-grid, oil shock, peer-to-peer lending, performance metric, renewable energy transition, Richard Feynman, ride hailing / ride sharing, rolling blackouts, Ronald Reagan, Silicon Valley, Silicon Valley startup, smart grid, smart meter, SoftBank, Solyndra, sovereign wealth fund, Ted Nordhaus, Tesla Model S, time value of money, undersea cable, vertical integration, wikimedia commons

Two assumptions stand out: One, the world will be able to build over three times as much nuclear capacity as currently exists; and two, every coal-fired power plant that doesn’t get shut down will be retrofitted with equipment to capture and store its carbon emissions. On its face, this plan seems sound in that it is based on a diversified portfolio of zero-carbon resources. Also, because both nuclear and fossil plants are widely used in today’s power sector, building them into the future electricity mix would be least disruptive to the status quo. But it would be very risky to bet on this route to decarbonizing the power sector. Tripling nuclear capacity could be tough, given that nuclear power’s share of global electricity supply actually declined over the last decade as a result of high costs and political opposition.17 Betting that carbon capture and storage from fossil plants can take off is even riskier; only a handful of demonstrations exist around the world—most of them very expensive.

They work this way because they have the capacity to scrutinize only a limited number of investments. The easiest way to satisfy both stipulations is to invest in listed securities, that is, stocks and bonds listed on public exchanges. This approach offers liquidity—it is straightforward to buy or sell securities on large exchanges—and it is possible to invest large sums in a diversified portfolio. To avoid having to perform due diligence on every stock or bond in which an investor has exposure, investors can invest in index funds, which themselves are listed securities that aggregate lots of individual stocks or bonds. Overall, institutional investors invest 80–90 percent of their portfolios in listed securities.35 For the most part, solar power projects fail to meet either of the criteria that institutional investors demand.

Perhaps from the ashes of SunEdison’s flameout will emerge a genuine solar supermajor. Toward YieldCo 2.0 The example from the oil and gas industry that inspired renewable energy YieldCos was a decades-old financial vehicle known as the “Master Limited Partnership (MLP).” An MLP pools together a diversified portfolio of oil and gas infrastructure assets, such as pipelines and processing facilities. Investors then can buy shares of MLPs on the stock market. MLPs get special treatment under the U.S. tax code: they pay no corporate tax and can distribute the revenue generated by their oil and gas assets directly to shareholders as dividends.


pages: 368 words: 145,841

Financial Independence by John J. Vento

Affordable Care Act / Obamacare, Albert Einstein, asset allocation, diversification, diversified portfolio, estate planning, financial independence, fixed income, high net worth, Home mortgage interest deduction, low interest rates, money market fund, mortgage debt, mortgage tax deduction, oil shock, Own Your Own Home, passive income, retail therapy, risk tolerance, the rule of 72, time value of money, transaction costs, young professional, zero day

When we analyze the risk versus return of cash, bonds, stocks, and alternatives, it has been shown that a properly diversified portfolio that includes these asset classes can minimize risk without sacrificing return. For example, in Exhibit 9.3, Investment Growth Based on Rates of Return 1980 to 2011, you can clearly see that if you invest 20 percent of your portfolio in stocks and 80 percent in bonds (rather than 100 percent in bonds), that can result in less risk with a higher return. The general rule of investing states the higher the risk, the higher the potential rate of return. This Nobel-prizewinning discovery by Harry Markowitz was able to show that with a properly diversified portfolio that included both stocks and bonds, it was actually possible to increase your rate of return and, at the same time, lower the risk of the overall portfolio.

Company- or industry-specific risk occurs when an event affects only a specific company or industry—for example, if accounting irregularities are discovered during a particular company’s financial statement audit, the value of investment in that company is likely to decrease. These types of events can have a significant effect on a company’s value as well as the confidence investors can place with its management. By far, this is the strongest reason for a well-diversified portfolio and why you should never keep all your eggs in one basket. Stocks, Bonds, Mutual Funds, and Exchange-Traded Funds The most efficient and popular way to invest is by purchasing individual stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Therefore, I believe that it is essential that I provide you with a description of each of these investment vehicles.

These investment vehicles may provide the potential for returns that could exceed inflation over the long term. Of course, these growth-oriented investment vehicles also come with a greater risk than other types of investments. As you select your asset allocation model based on your risk tolerance level, never forget that smart investors always focus on a well-diversified portfolio. Taking on too much risk or taking on too little risk can both be equally damaging to your financial success. You must find your own perfect balance in determining your own risk-reward ratio. When investing, you must always consider the tax consequences of your investment when determining your true rate of return.


pages: 935 words: 267,358

Capital in the Twenty-First Century by Thomas Piketty

accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, book value, Branko Milanovic, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, carbon tax, central bank independence, centre right, circulation of elites, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation coefficient, David Ricardo: comparative advantage, demographic transition, distributed generation, diversification, diversified portfolio, European colonialism, eurozone crisis, Fall of the Berlin Wall, financial intermediation, full employment, Future Shock, German hyperinflation, Gini coefficient, Great Leap Forward, high net worth, Honoré de Balzac, immigration reform, income inequality, income per capita, index card, inflation targeting, informal economy, invention of the steam engine, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Arrow, low interest rates, market bubble, means of production, meritocracy, Money creation, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, open economy, Paul Samuelson, pension reform, power law, purchasing power parity, race to the bottom, randomized controlled trial, refrigerator car, regulatory arbitrage, rent control, rent-seeking, Robert Gordon, Robert Solow, Ronald Reagan, Simon Kuznets, sovereign wealth fund, Steve Jobs, Suez canal 1869, Suez crisis 1956, The Nature of the Firm, the payments system, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade liberalization, twin studies, very high income, Vilfredo Pareto, We are the 99%, zero-sum game

But this is probably not true at all levels: as we move down the list into the $1–10 billion range (and according to Forbes, several hundred new fortunes appear in this range somewhere in the world almost every year), or even more into the $10–$100 million range, it is likely that many inherited fortunes are held in diversified portfolios, in which case they are difficult for journalists to detect (especially since the individuals involved are generally far less eager to be known publicly than entrepreneurs are). Because of this straightforward statistical bias, wealth rankings inevitably tend to underestimate the size of inherited fortunes. Some magazines, such as Challenges in France, state openly that their goal is simply to catalog so-called business-related fortunes, that is, fortunes consisting primarily of the stock of a particular company. Diversified portfolios do not interest them.

We cannot rule out the possibility that the pure return on capital will rise to higher levels over the next few decades, especially in view of the growing international competition for capital and the equally increasing sophistication of financial markets and institutions in generating high yields from complex, diversified portfolios. In any case, this virtual stability of the pure return on capital over the very long run (or more likely this slight decrease of about one-quarter to one-fifth, from 4–5 percent in the eighteenth and nineteenth centuries to 3–4 percent today) is a fact of major importance for this study.

This logical contradiction cannot be resolved by a dose of additional competition. Rent is not an imperfection in the market: it is rather the consequence of a “pure and perfect” market for capital, as economists understand it: a capital market in which each owner of capital, including the least capable of heirs, can obtain the highest possible yield on the most diversified portfolio that can be assembled in the national or global economy. To be sure, there is something astonishing about the notion that capital yields rent, or income that the owner of capital obtains without working. There is something in this notion that is an affront to common sense and that has in fact perturbed any number of civilizations, which have responded in various ways, not always benign, ranging from the prohibition of usury to Soviet-style communism.


pages: 353 words: 88,376

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

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

Diversification strives to smooth out unsystematic risk in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not correlated. Investopedia explains Diversification Studies and mathematical models have shown that maintaining a well-diversified portfolio of 25 to 30 stocks will yield the most cost-effective level of risk reduction. Investing in more securities will yield further diversification benefits, but to a drastically smaller degree. Further diversification benefits can be gained by investing in foreign securities because they tend to be less closely correlated with domestic investments.

Mutual funds are operated by money managers, who actively manage a fund’s assets in an attempt to produce positive returns for the fund’s investors. A mutual fund’s portfolio strategy is structured and maintained to match the investment objectives stated in its prospectus. Investopedia explains Mutual Fund Mutual funds are popular because they give small investors access to professionally managed, diversified portfolios of stocks, bonds, and other securities that would be quite difficult (if not impossible) for investors to replicate on their own with a small amount of money. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and typically can be purchased or redeemed as needed at the fund’s current net asset value (NAV) per share, which sometimes is expressed as NAVPS.

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


pages: 733 words: 179,391

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

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

If the previous sentence sounds like the fine print of an insurance policy, it should; business conditions often shift violently and “long enough” depends on a lot of things. For example, between October 2007 and February 2009, imagine if you had your entire nest egg invested in the S&P 500, a well-diversified portfolio of five hundred of the largest U.S.-based companies. You would have lost about 51 percent of your life savings over those seventeen stressful months. As you watched your retirement evaporate a few percentage points each month, at what point would your “fear factor” have kicked in and caused you to cash out?

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

In fact, many economists and prominent investment professionals believe that, on average, mutual fund alphas are either zero or negative after deducting fees, and argue that you should always put all your money in low-cost index funds. Principle 3 follows logically from the CAPM. By estimating the alphas and betas of financial investments, we should be able to construct passive, highly diversified portfolios of stocks weighted by their market capitalization to achieve reasonably attractive returns. (What does “reasonably attractive” mean here? An expected return that’s consistent with the portfolio’s beta.) Alpha seems rare—how many David Shaws do you know, and how easy is it to identify them before they become wildly successful and retire?


pages: 1,088 words: 228,743

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

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

Thus the goal of HF beta investing is to create a portfolio of alternative betas, while leaving out traditional ones. Capturing HF betas requires skill, both in defining them (identifying smart strategies: inclusion, weighing, rebalancing) and in implementing them cost-effectively and with effective risk management. With HF betas we can structure a diversified portfolio with an especially attractive reward-to-risk ratio (e.g., combining value and momentum strategies that both have a positive alpha but that are often negatively correlated to each other). Truly original proprietary strategies have a special premium in today’s competitive environment where fears of being in overcrowded trades are not unreasonable.

Over my full sample, an undiversified first–tenth trade (i.e., buying the single highest yielding and shorting the lowest yielding currency) gave a moderately higher excess return (8%) but much higher volatility (16%), resulting in an SR of 0.51—compared with the base case 6%/10%/0.61 noted above. In the other extreme, a diversified portfolio that buys equal amounts of the highest yielding five currencies and that shorts the lowest yielding five currencies earned 4% with a low 7% volatility, resulting in an SR of 0.62. Thus, in risk-adjusted terms, diversification across signals is somewhat more beneficial than exploiting the strongest signal.

• Momentum strategies can be traded on a single asset (trend following) or across assets (long–short trading). One can use many types of momentum signals (past returns, moving averages, breakout, consistency, etc.) and various lookback window lengths (to capture shorter and longer trends). • For single commodities, the SR of trend-following strategies is typically between 0.0 and 0.5. For a diversified portfolio of them, the SR is between 0.5 and 1.0—at the higher end if volatility weighting is used. However, actual CTAs (commodity trading advisors) rarely have as good SRs as these simulated strategies. • Momentum patterns likely reflect behavioral factors—investor underreaction to news and overreaction to recent returns (extrapolating past returns).


pages: 306 words: 97,211

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

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

As a group they produced a body of work, sometimes called modern investment theory, that, if accurate, has several inescapable implications for investors: • The market is efficient, and it is not possible to outdo its returns except by accident. • Risk is measured by the contribution of individual securities to the volatility of returns of widely diversified portfolios, rather than the more common-sense understanding of risk as permanent loss of capital. • The best strategy for investors is to buy a broad index of securities and adjust for the desired level of risk by combining investments in this index portfolio with greater or lesser amounts of a risk-free asset, such as cash.

Because, as the theory holds, it is possible to diversify away the risks of holding only one or a few securities, investors will not be rewarded for those risks that they assume in running narrow portfolios. The only risk that does earn a com mensurate reward is the risk of volatility, or the risk that the diversified portfolio will move up and down at a greater rate than some even more broadly diversified benchmark, like the Standard & Poor's 500 index or the Wilshire 5000. The efficient market hypothesis-the idea that the market always incorporates the best estimate of the true value of a security-is embedded in this conception of risk and diversification; otherwise it might be possible for a clever investor to pick relatively few securities and be rewarded for these selections.

The thoroughly informed investor, knowledgeable about the industry, the company, and even the economy, can take fewer and larger positions in situations in which he or she is fully informed. Value investors come down on both sides of the question of diversification, although all of them think there is an important role for active stock selection. The Schlosses run a diversified portfolio, but they do it without prescribed limits on the size of a position they will take. Though they may own 100 names, it is typical for the largest 20 positions to account for around 60 per cent of the portfolio. They have occasionally had up to 20 percent of their fund in a single security, but that degree of concentration is a rarity.


Investment: A History by Norton Reamer, Jesse Downing

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

Alternatives (a class of investments that includes hedge funds, private equity, and venture capital) tend to be high-fee, relatively exclusive, and often institutionally oriented products. Index funds and ETFs, by contrast, are low fee, typically involve passive and rules-based ownership, and are available for retail investors and institutions alike. Debates have raged over the relative superiority of these as well as the ability to combine the two classes in a diversified portfolio. Few examinations, however, have sought to uncover their respective historical developments to unlock meaning and their possible futures. This chapter aims to do precisely that, unearthing the origins and evolution of these investment vehicles. More New Investment Forms 257 ALTERNATIVE INVESTMENTS: HEDGE FUNDS, PRIVATE EQUITY, AND VENTURE CAPITAL The realm of alternative investments is vast and includes not just hedge funds, private equity, and venture capital but also commodities, real estate, and infrastructure.

Actual investable commodities indices are far more recent, coming into existence in 1991 with the Goldman Sachs 282 Investment: A History Commodity Index (S&P GSCI) and later in 1998 with the Dow Jones UBS Commodity Index.48 Commodities and natural resources investments include both traditional futures and collateralized commodity futures, as well as direct holdings of physical assets such as gold and other natural resources. Mineral rights and the licensing of revenue streams are also examples of real-world commodities and natural resources investments in the alternatives space. Commodity investments are an attractive way to diversify portfolios because they often have high returns and low correlations to equities and other liquid investable assets.49 timber, agriculture, and farmland The Employee Retirement Income Security Act of 1974 was a major catalyst for investment in timberland, since pension funds now had the ability to move into new and more esoteric asset classes.50 Since the mid-1980s, institutional assets invested in timber have grown dramatically, from $1 billion to more than $50 billion.51 Asset returns were strong through the 1980s to the 1990s, resting in part on Japanese demand and pricing.

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


pages: 670 words: 194,502

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

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

(Interestingly, that projection matches the estimate we got earlier when we added together real growth, inflationary growth, and speculative growth.) Compared to the 1990s, 6% is chicken feed. But it’s a whisker better than the gains that bonds are likely to produce—and reason enough for most investors to hang on to stocks as part of a diversified portfolio. But there is a second lesson in Graham’s approach. The only thing you can be confident of while forecasting future stock returns is that you will probably turn out to be wrong. The only indisputable truth that the past teaches us is that the future will always surprise us—always! And the corollary to that law of financial history is that the markets will most brutally surprise the very people who are most certain that their views about the future are right.

Unlike traditional brokers or mutual funds that won’t let you in the door for less than $2,000 or $3,000, these online firms have no minimum account balances and are tailor-made for beginning investors who want to put fledgling portfolios on autopilot. To be sure, a transaction fee of $4 takes a monstrous 8% bite out of a $50 monthly investment—but if that’s all the money you can spare, then these microinvesting sites are the only game in town for building a diversified portfolio. You can also buy individual stocks straight from the issuing companies. In 1994, the U.S. Securities and Exchange Commission loosened the handcuffs it had long ago clamped onto the direct sale of stocks to the public. Hundreds of companies responded by creating Internet-based programs allowing investors to buy shares without going through a broker.

I further make a solemn commitment never to invest because the stock market has gone up, and never to sell because it has gone down. Instead, I will invest $______.00 per month, every month, through an automatic investment plan or “dollar-cost averaging program,” into the following mutual fund(s) or diversified portfolio(s): _________________________________, _________________________________, _________________________________. I will also invest additional amounts whenever I can afford to spare the cash (and can afford to lose it in the short run). I hereby declare that I will hold each of these investments continually through at least the following date (which must be a minimum of 10 years after the date of this contact): _________________ _____, 20__.


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

Alan Greenspan, Albert Einstein, Alvin Toffler, behavioural economics, Bernie Madoff, Black Swan, business cycle, buy and hold, commodity trading advisor, correlation coefficient, delayed gratification, disinformation, diversified portfolio, en.wikipedia.org, Eugene Fama: efficient market hypothesis, family office, full employment, global macro, Jim Simons, Lao Tzu, Long Term Capital Management, managed futures, market bubble, market microstructure, Market Wizards by Jack D. Schwager, Mikhail Gorbachev, moral hazard, Myron Scholes, Nick Leeson, oil shock, Ponzi scheme, prediction markets, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Sharpe ratio, systematic trading, the scientific method, three-martini lunch, transaction costs, tulip mania, upwardly mobile, Y2K, zero-sum game

They are all the same when you look at price data only. If they are all the same, then an opportunistic strategy that is ready to go when a trend starts can make you serious money. That’s how the fortunes discussed in the earlier chapter “Show Me the Money” were made. The following is an example of a diversified portfolio that you could use as a starting point for assembling your own portfolio (with the exchanges listed where markets are traded): British Pound (CME; www.cmegroup.com) Canadian Dollar (CME) Euro (CME) Swiss Franc (CME) Japanese Yen (CME) Australian Dollar (CME) Mexican Peso (CME) Eurodollar (CME) Euribor (NYSE LIFFE; www.euronext.com) Aussie Bank Bills (ASX; www.asx.com.au) U.S. 10-Year Note (CME) U.S. 30-Year Bond (CME) 66 Tre n d C o m m a n d m e n t s Canadian Gov’t.

., 223 Commodities Corporation, 69 D commodity trading advisors (CTAs), defined, 11 decisions, immediacy of, 131-132 The Complete TurtleTrader (Covel), 199 compounding, importance of, 22-23 degrees, worth of, 123 delay in decision-making, avoiding, 131-132 Dennis, Richard, 199 computers, role in trend following, 87-88 “Determining Optimal Risk” (Druz and Seykota), 62 consistency, 139 diversified portfolios, example of, 65-67 Contact (film), 4 contradictions in market predictions, 175-178 Donahue, Phil, 113 Donchian, Richard, 230-231, 239 Index Dow Theory, 225-226 fat tails, 137 Dow, Charles H., 225 Faulkner, Charles, 59 drawdowns, 69-70 Field, Jacob, 226 Druz, David, 18, 62 50 Cent, 166 Duchovny, David, 211 financial bubbles, irrational behavior in, 25-26 Dunn, Bill, 15-16, 195 Dunnigan, William, 229-230, 239 E Economic Bill of Rights, 114 economic philosophy, assumptions in, 25 economy, effect on presidential approval ratings, 181-182 Edwards, Robert D., 226 Efficient-Markets Hypothesis, 101-102 Elizabeth II (queen of England), 47 Elliott, R.


pages: 229 words: 61,482

The Gig Economy: The Complete Guide to Getting Better Work, Taking More Time Off, and Financing the Life You Want by Diane Mulcahy

Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, basic income, Clayton Christensen, cognitive bias, collective bargaining, creative destruction, David Brooks, deliberate practice, digital nomad, diversification, diversified portfolio, fear of failure, financial independence, future of work, gig economy, helicopter parent, Home mortgage interest deduction, housing crisis, independent contractor, job satisfaction, Kickstarter, loss aversion, low interest rates, low skilled workers, Lyft, mass immigration, mental accounting, minimum wage unemployment, mortgage tax deduction, negative equity, passive income, Paul Graham, remote working, risk tolerance, Robert Shiller, seminal paper, Silicon Valley, Snapchat, social contagion, TaskRabbit, TED Talk, the strength of weak ties, Uber and Lyft, uber lyft, universal basic income, wage slave, WeWork, Y Combinator, Zipcar

Diversifying our interests brings balance and variety to our lives and gives us a way to explore our passions, nurture new interests, and satisfy our curiosities. Like Allison, we can be the public speaking coach and the folk singer. We have the freedom to have multiple identities and the chance to focus on both personal and professional goals. Management thinker Charles Handy described the idea of a diversified portfolio career as “a portfolio of activities—some we do for money, some for interest, some for pleasure, some for a cause.”1 Portfolio workers were individuals who purposefully chose to build a diversified life of multiple roles and projects, both paid and unpaid. They could accomplish personal and professional goals and achieve a balance between money and love, play and work, passion and pragmatism.

It turns out that over-diversifying can be just as bad; it may constrain your losses, but it also limits your gains. Excess diversification eliminates the risk that any one company’s poor performance will tank the portfolio but also limits the gain you’ll realize from any outperformance. Over-diversified portfolios generate average returns that mirror, rather than outperform, the general market because the performance of any single stock doesn’t meaningfully impact the performance of the whole portfolio. We risk over-diversification if we spread ourselves too thin and do too much. If we over-diversify, we risk achieving less than we hoped and expected.


pages: 240 words: 60,660

Models. Behaving. Badly.: Why Confusing Illusion With Reality Can Lead to Disaster, on Wall Street and in Life by Emanuel Derman

Albert Einstein, Asian financial crisis, Augustin-Louis Cauchy, Black-Scholes formula, British Empire, Brownian motion, capital asset pricing model, Cepheid variable, creative destruction, crony capitalism, currency risk, diversified portfolio, Douglas Hofstadter, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, Financial Modelers Manifesto, fixed income, Ford Model T, Great Leap Forward, Henri Poincaré, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, Isaac Newton, Johannes Kepler, law of one price, low interest rates, Mikhail Gorbachev, Myron Scholes, quantitative trading / quantitative finance, random walk, Richard Feynman, riskless arbitrage, savings glut, Schrödinger's Cat, Sharpe ratio, stochastic volatility, the scientific method, washing machines reduced drudgery, yield curve

Idiosyncratic risk is avoidable: it can be diminished by diversification, the assembly of a portfolio of many stocks whose idiosyncratic risks are unrelated and therefore tend to cancel each other out. (This tendency to cancel is similar to the tendency of independent random up and down stock price moves in Figure 5.2 to cancel, so that the idiosyncratic risk of a portfolio of n stocks grows only as fast as Vn.) All that afflicts a stock in a (theoretically) diversified portfolio of many stocks is therefore the market risk it carries. CAPM characterizes each stock’s unavoidable market risk by a statistic, β (beta), the ratio of its individual market risk to the risk of the entire market. The β of each stock describes its tendency to herd with the crowd, and different stocks have different measurable betas.13 The greater the beta of a stock, the more it responds to a market move.

But CAPM has had a beneficial impact, having being responsible for introducing into finance as metaphors the notion of alpha and beta. Alpha and beta represent the sources of return. Beta refers to the return earned for simply entering the market dumbly. Getting beta is easy: all you have to do is buy a diversified portfolio of stocks without worrying about their individual attributes. Alpha, in contrast, represents skill, the return generated by being smarter than the hordes, by picking better-than-average stocks, or picking ordinary stocks at the right time, as with Apple in the example above. Inspired by CAPM, investors now ask themselves whether their manager is providing merely dumb beta or smart alpha.


pages: 288 words: 64,771

The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality by Brink Lindsey

Airbnb, Asian financial crisis, bank run, barriers to entry, Bernie Sanders, Build a better mousetrap, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, Cass Sunstein, collective bargaining, creative destruction, Credit Default Swap, crony capitalism, Daniel Kahneman / Amos Tversky, David Brooks, diversified portfolio, Donald Trump, Edward Glaeser, endogenous growth, experimental economics, experimental subject, facts on the ground, financial engineering, financial innovation, financial intermediation, financial repression, hiring and firing, Home mortgage interest deduction, housing crisis, income inequality, informal economy, information asymmetry, intangible asset, inventory management, invisible hand, Jones Act, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, knowledge worker, labor-force participation, Long Term Capital Management, low skilled workers, Lyft, Mark Zuckerberg, market fundamentalism, mass immigration, mass incarceration, medical malpractice, Menlo Park, moral hazard, mortgage debt, Network effects, patent troll, plutocrats, principal–agent problem, regulatory arbitrage, rent control, rent-seeking, ride hailing / ride sharing, Robert Metcalfe, Robert Solow, Ronald Reagan, Savings and loan crisis, Silicon Valley, Silicon Valley ideology, smart cities, software patent, subscription business, tail risk, tech bro, too big to fail, total factor productivity, trade liberalization, tragedy of the anticommons, Tragedy of the Commons, transaction costs, tulip mania, Tyler Cowen, Uber and Lyft, uber lyft, Washington Consensus, white picket fence, winner-take-all economy, women in the workforce

And why do banks stoutly resist higher capital requirements on the ground that equity funding is so much more expensive than debt? First, financial firms may be able to rely more on debt because the assets they are borrowing against are much more stable in value than those of nonfinancial firms. As John Cochrane has pointed out, a diversified portfolio of loans and securities just isn’t very risky, certainly not in comparison to the expected future profit flows of a single company.20 Second, beyond the difference in market fundamentals, financial firms’ predilection for debt may also reflect a market failure. Specifically, in judging the trade-off between risk and reward when choosing how much debt to take on, financial firms may look only at their own individual situation and not take account of the destabilizing effects of aggregate leverage in the financial system.21 Given the fact that banks borrow from each other and also considering the risk of contagion during bad times, levels of leverage that might be fine for a single institution become problematic if more widespread.

As copyright terms have lengthened (and, simultaneously, global markets have grown by leaps and bounds), the industry has become progressively organized around the maximization of returns from the occasional runaway crowd favorite. This task requires large-scale investments in talent search and marketing for success in the long term, which means developing a diversified portfolio of new talent and a growing inventory of cash cows to milk as efficiently and as long as possible. Neither software nor pharmaceuticals can match the entertainment industry for its extremes. On one end, there is an enormous volume of low-selling books, records, and films; at the other end, many blockbusters remain bestsellers for decades.


pages: 295 words: 66,824

A Mathematician Plays the Stock Market by John Allen Paulos

Alan Greenspan, AOL-Time Warner, Benoit Mandelbrot, Black-Scholes formula, book value, Brownian motion, business climate, business cycle, butter production in bangladesh, butterfly effect, capital asset pricing model, confounding variable, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversified portfolio, dogs of the Dow, Donald Trump, double entry bookkeeping, Elliott wave, endowment effect, equity risk premium, Erdős number, Eugene Fama: efficient market hypothesis, four colour theorem, George Gilder, global village, greed is good, index fund, intangible asset, invisible hand, Isaac Newton, it's over 9,000, John Bogle, John Nash: game theory, Larry Ellison, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, mental accounting, Myron Scholes, Nash equilibrium, Network effects, passive investing, Paul Erdős, Paul Samuelson, Plato's cave, Ponzi scheme, power law, price anchoring, Ralph Nelson Elliott, random walk, Reminiscences of a Stock Operator, Richard Thaler, risk free rate, Robert Shiller, short selling, six sigma, Stephen Hawking, stocks for the long run, survivorship bias, transaction costs, two and twenty, ultimatum game, UUNET, Vanguard fund, Yogi Berra

Students who miss a lot of classes generally (although certainly not always) achieve a lower score, so the extremes of the sum, number of classes missed plus exam scores, are going to be considerably less than they would be if number of classes missed and exam scores did not have a negative covariance. When choosing stocks for a diversified portfolio, investors, as noted, generally look for negative covariances. They want to own equities like the Hatfield and the McCoy stocks and not like WCOM, say, and some other telecommunications stock. With three or more stocks in a portfolio, one uses the stocks’ weights in the portfolio as well as the definitions just discussed to compute the portfolio’s variance and standard deviation.

Brian auditors Aumann, Robert availability error average values compared with distribution of incomes risk as variance from averages average return compared with median return average value compared with distribution of incomes buy-sell rules and outguessing average guess risk as variance from average value averaging down Bachelier, Louis Bak, Per Barabasi, Albert-Lazló Bartiromo, Maria bear markets investor self-descriptions and shorting and distorting strategy in Benford, Frank Benford’s Law applying to corporate fraud background of frequent occurrence of numbers governed by Bernoulli, Daniel Beta (B) values causes of variations in comparing market against individual stocks or funds strengths and weaknesses of technique for finding volatility and Big Bang billiards, as example of nonlinear system binary system biorhythm theory Black, Fischer Black-Scholes option formula blackjack strategies Blackledge, Todd “blow up,” investor blue chip companies, P/E ratio of Bogle, John bonds Greenspan’s impact on bond market history of stocks outperforming will not necessarily continue to be outperformed by stocks Bonds, Barry bookkeeping. see accounting practices bottom-line investing Brock, William brokers. see stock brokers Buffett, Warren bull markets investor self-descriptions and pump and dump strategy in Butterfly Economics (Ormerod) “butterfly effect,” of nonlinear systems buy-sell rules buying on the margin. see also margin investments calendar effects call options. see also stock options covering how they work selling strategies valuation tools campaign contributions Capital Asset Pricing Model capital gains vs. dividends Central Limit Theorem CEOs arrogance of benefits in manipulating stock prices remuneration compared with that of average employee volatility due to malfeasance of chain letters Chaitin, Gregory chance. see also whim trading strategies and as undeniable factor in market chaos theory. see also nonlinear systems charity Clayman, Michelle cognitive illusions availability error confirmation bias heuristics rules of thumb for saving time mental accounts status quo bias Cohen, Abby Joseph coin flipping common knowledge accounting scandals and definition and importance to investors dynamic with private knowledge insider trading and parable illustrating private information becoming companies/corporations adjusting results to meet expectations applying Benford’s Law to corporate fraud comparing corporate and personal accounting financial health and P/E ratio of blue chips competition vs. cooperation, prisoner’s dilemma complexity changing over time horizon of sequences (mathematics) of trading strategies compound interest as basis of wealth doubling time and formulas for future value and present value and confirmation bias definition of investments reflecting stock-picking and connectedness. see also networks European market causing reaction on Wall Street interactions based on whim interactions between technical traders and value traders irrational interactions between traders Wolfram model of interactions between traders Consumer Confidence Index (CCI) contrarian investing dogs of the Dow measures of excellence and rate of return and cooperation vs. competition, prisoner’s dilemma correlation coefficient. see also statistical correlations counter-intuitive investment counterproductive behavior, psychology of covariance calculation of portfolio diversification based on portfolio volatility and stock selection and Cramer, James crowd following or not herd-like nature of price movements dart throwing, stock-picking contest in the Wall Street Journal data mining illustrated by online chatrooms moving averages and survivorship bias and trading strategies and DeBondt, Werner Deciding What’s News (Gans) decimalization reforms decision making minimizing regret selling WCOM depression of derivatives trading, Enron despair and guilt over market losses deviation from the mean. see also mean value covariance standard deviation (d) variance dice, probability and Digex discounting process, present value of future money distribution of incomes distribution of wealth dynamic of concentration UN report on diversified portfolios. see stock portfolios, diversifying dividends earnings and proposals benefitting returns from Dodd, David dogs of the Dow strategy “dominance” principle, game theory dot com IPOs, as a pyramid scheme double-bottom trend reversal “double-dip” recession double entry bookkeeping doubling time, compound interest and Dow dogs of the Dow strategy percentages of gains and losses e (exponential growth) compound interest and higher mathematics and earnings anchoring effect and complications with determination of inflating (WCOM) P/E ratio and stock valuation and East, Steven H.


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

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

There's no hard and fast answer for this since some individuals are very entrepreneurial and want to actively manage where their dollars are put to work, and some individuals are already booked solid and want a more passive approach. The key to this is to simply get started. This section will give you 90% of the knowledge and resources to get started investing today. Invest in an adequately diversified portfolio of low cost passive investments and hold for the long term. That sentence holds all the secrets and techniques needed to invest and thrive. Don't spend a dime on finance gurus and conferences that will teach you "the 5 key techniques to earning millions on stocks" or "the secret to how I made $65,000 in a month."


pages: 94 words: 18,728

Stop Saving Start Investing: Ten Simple Rules for Effectively Investing in Funds by Jonathan Hobbs

Albert Einstein, diversified portfolio, en.wikipedia.org, financial independence, low interest rates, selective serotonin reuptake inhibitor (SSRI)

CHAPTER 4 OWNING STOCKS THROUGH FUNDS: THE FUND OF FUNDS STRATEGY “Funds were created to make investing easy, so consumers wouldn’t have to be burdened with picking individual stocks.” Scott Cook It’s fun to pick your own stocks. But it can also be emotionally draining and take up a lot of time, especially if you’re new to stock investing. By investing in funds, it’s easy to own a diversified portfolio of stocks in companies from all over the world. Using the right fund managers will bring you peace of mind that your investments are in good hands. What is a fund? A google search will tell you that a mutual fund is “an investment programme funded by shareholders that trades in diversified holdings and is professionally managed.”


pages: 304 words: 80,965

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

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

That’s why academics call diversification the “only free lunch” for investors.35 All the free food at the diversification buffet may lead us to ignore a key fact: diversification is no defense against systemic risk, meaning risks to broad swaths of the market. That seems obvious; if the entire market declines, a diversified portfolio will decline, too. What is less obvious is that widespread diversification may actually increase systematic risk. It may even have helped cause the global financial crisis. To understand how, we first need to understand how the financial markets employ diversification. Most people might think that a good investor is someone like Warren Buffett, who identifies good investment opportunities, doesn’t place all his eggs in one basket, and watches those investments closely.

While individual investors account for 27 percent of the average company’s shareholders, they tend to be more passive than institutional investors in exercising their responsibilities and rights. Individuals vote the proxies for just 29 percent of their shares, while institutions vote 90 percent of theirs.72 One reason is that individuals are daunted by the complexity of voting. The information is often convoluted, and the process time consuming. If you own a diversified portfolio of individual stocks, you may have to do it twenty or thirty times or more. But technology has made it possible for individuals to vote their preferences without the need for individual review of each proxy. “Advance Voting Instructions” (AVI) allow investors to vote automatically with or against management, or with a well-known third party such as the giant pension fund CalPERS, or with the recommendations of a proxy voting agency.


pages: 507 words: 145,878

The Predators' Ball: The Inside Story of Drexel Burnham and the Rise of the JunkBond Raiders by Connie Bruck

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Alvin Toffler, Bear Stearns, book value, Carl Icahn, corporate raider, diversified portfolio, Edward Thorp, financial independence, fixed income, Future Shock, Glass-Steagall Act, Irwin Jacobs, junk bonds, Michael Milken, mortgage debt, offshore financial centre, Oscar Wyatt, paper trading, profit maximization, Tax Reform Act of 1986, The Predators' Ball, yield management, Yogi Berra, zero-coupon bond

And there were the money managers—people who ran investment portfolios for thrift institutions, insurance companies, public and private pension funds, mutual funds, offshore banks, college endowments, high-yield funds. Many of them had been converted into believers by Milken back in the seventies, when he had begun tirelessly preaching an esoteric gospel: that in a diversified portfolio of high-yield bonds, otherwise known as “junk” bonds, the reward outweighs the risk. This was a proven theory, well documented by academician W. Braddock Hickman in his enormous multivolume tome Corporate Bond Quality and Investor Experience, published in the fifties. All that remained, for everyone to make money, more money probably than they had ever imagined, was to put theory into practice.

OVER THE NEXT several years, Milken began to cultivate a group of increasingly satisfied customers. There were a handful of institutions, like Massachusetts Mutual, and discount-bond mutual funds, including Keystone B4, Lord Abbott Bond Debenture, and National Bond Fund. These tended to play the market according to Hickman, going for the yield over time in large, diversified portfolios. There was also David Solomon, of First Investors Fund for Income, known as FIFI. FIFI was converting its high-grade-bond fund (with bonds that had suffered in the recession) to a high-yield fund in 1973, at about the time that Solomon was employed to manage it. According to former members of Milken’s group, Milken soon took Solomon in hand, and the returns on Solomon’s portfolio showed the effect.

Milken had his stable of clients, but if this market was to thrive it would need a much broader base. Milken and Joseph quickly determined, however, that they would not distribute the bonds through Drexel’s retail system. Milken followed the old Hickman credo on diversification. The retail customers with their small holdings would not have diversified portfolios, and without diversification Milken was convinced he would ultimately kill his clients. The way to reach those retail buyers, Milken and Joseph decided, was to invent high-yield-bond funds, where the portfolio would be diversified. First Investors Fund for Income (FIFI) had been operating essentially as a high-yield-bond fund since Milken began tutoring David Solomon, in the midseventies.


pages: 408 words: 85,118

Python for Finance by Yuxing Yan

asset-backed security, book value, business cycle, business intelligence, capital asset pricing model, constrained optimization, correlation coefficient, data science, distributed generation, diversified portfolio, financial engineering, functional programming, implied volatility, market microstructure, P = NP, p-value, quantitative trading / quantitative finance, risk free rate, Sharpe ratio, tail risk, time value of money, value at risk, volatility smile, zero-sum game

Number of stocks and portfolio risk We know that when we increase the number of stocks in a portfolio, we would diversify away firm-specific risk. However, how many stocks do we need to diversify away from most of the firm-specific risk? Statman (1987) argues that we need at least 30 stocks. The title of his paper is How Many Stocks Make a Diversified Portfolio? in the Journal of Financial Quantitative Analysis. Based on his relationship between n (number of stocks) and the ratio of the portfolio standard deviation to the standard deviation of a single stock, we have the graph showing the relationship between the two. The values in the following table are from Statman (1987) where n is the number of stocks in a portfolio, V S is the standard deviation of the annual portfolio returns, and V is the average of the standard deviation of a one-stock portfolio: n VS VS V n VS VS V 1 49.236 1.00 45 20.316 0.41 2 37.358 0.76 50 20.203 0.41 4 29.687 0.60 75 19.860 0.40 6 26.643 0.54 100 19.686 0.40 [ 142 ] Chapter 7 n VS VS V n VS VS V 8 24.983 0.51 200 19.432 0.39 10 23.932 0.49 300 19.336 0.39 12 23.204 0.47 400 19.292 0.39 14 22.670 0.46 500 19.265 0.39 16 22.261 0.45 600 19.347 0.39 18 21.939 0.45 700 19.233 0.39 20 21.677 0.44 800 19.224 0.39 25 21.196 0.43 900 19.217 0.39 30 20.870 0.42 1000 19.211 0.39 35 20.634 0.42 f 19.158 0.39 40 20.456 0.42 The following is our program: from matplotlib.pyplot import * n=[1,2,4,6,8,10,12,14,16,18,20,25,30,35,40,45,50,75,100,200,300,400,500,6 00,700,800,900,1000] port_sigma=[0.49236,0.37358,0.29687,0.26643,0.24983,0.23932,0.23204, 0.22670,0.22261,0.21939,0.21677,0.21196,0.20870,0.20634,0.20456,0.20316,0 .20203,0.19860,0.19686,0.19432,0.19336,0.19292,0.19265,0.19347,0.19233,0. 19224,0.19217,0.19211,0.19158] xlim(0,50) ylim(0.1,0.4) hlines(0.19217, 0, 50, colors='r', linestyles='dashed') annotate('', xy=(5, 0.19), xycoords = 'data',xytext = (5, 0.28), textcoords = 'data',arrowprops = {'arrowstyle':'<->'}) annotate('', xy=(30, 0.19), xycoords = 'data',xytext = (30, 0.1), textcoords = 'data',arrowprops = {'arrowstyle':'<->'}) annotate('Total portfolio risk', xy=(5,0.3),xytext=(25,0.35), arrowprops=dict(facecolor='black',shrink=0.02)) figtext(0.15,0.4,"Diversiable risk") figtext(0.65,0.25,"Nondiversifiable risk") plot(n[0:17],port_sigma[0:17]) [ 143 ] Visual Finance via Matplotlib title("Relationship between n and portfolio risk") xlabel("Number of stocks in a portfolio") ylabel("Ratio of Portfolio std to std of one stock") show() In the preceding code, the values for n, that is, the number of stocks in a portfolio, and port_swigma, that is, the portfolio standard deviation, are from Statman (1987).

You can use the latest five-year data from Yahoo! Finance to support your arguments. 11. What is the Capital Market Line? How do we visualize this concept? 12. What is the Security Market Line? How do we visualize this concept? 13. Could you find empirical evidence to support or dispute the argument made by Statman (1987) that a well-diversifiable portfolio should at least be holding 30 stocks? 14. Construct an efficient frontier with the use of ten stocks from Yahoo! Finance. You can use either monthly or daily data. 15. How do we show the relationship between risk and returns? 16. What is the correlation between the US stock market and the Canadian stock market?


pages: 108 words: 27,451

Magic Internet Money: A Book About Bitcoin by Jesse Berger

Alan Greenspan, barriers to entry, bitcoin, blockchain, Bretton Woods, Cambridge Analytica, capital controls, carbon footprint, correlation does not imply causation, cryptocurrency, diversification, diversified portfolio, Ethereum, ethereum blockchain, fiat currency, Firefox, forward guidance, Fractional reserve banking, George Gilder, inflation targeting, invisible hand, Johann Wolfgang von Goethe, liquidity trap, litecoin, low interest rates, Marshall McLuhan, Metcalfe’s law, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, Nixon shock, Nixon triggered the end of the Bretton Woods system, oil shale / tar sands, planned obsolescence, price mechanism, Ralph Waldo Emerson, rent-seeking, reserve currency, ride hailing / ride sharing, risk tolerance, Robert Metcalfe, Satoshi Nakamoto, the medium is the message, Vitalik Buterin

Systematic risk, also known as “market risk,” is more comprehensive, with global implications resulting from macro-economic forces such as inflation, interest rates, exchange rates, taxes, or political and social instabilities. To combat unsystematic risks, many investment funds and wealth managers embrace the mantra of not putting all your eggs in one basket, diversifying portfolios by mixing a variety of asset types across different industries and geographies. This allows smaller and confined risk events negatively affecting one investment to be offset by others that react differently to those same events, or that experience unrelated positive effects. Guarding against systematic risk is more difficult.


pages: 825 words: 228,141

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

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

So it’s totally up to you. Once again, I’m not here to give you my opinion, just the best insights available from the best experts. For most people, lump-sum investing is not an issue because they don’t have a significant sum to invest! If that’s your situation, you’ll still maximize your returns by investing in a diversified portfolio with dollar-cost averaging. * * * 12. If you look on most of today’s stock charts, you may see that Citigroup was selling for $10.50 on March 9, 2009, and $50.50 on August 27, 2009. This is not accurate. These charts have been reformatted to reflect the fact that on May 6, 2011, Citigroup did a reverse stock split.

Would you have white knuckled it and held on? When Mark asked the newsletter publisher about whether or not investors could actually hang on during the roller coaster ride, he provided quite the understatement by saying, in an email, that his approach isn’t for an investor who “bails out of his/her broadly diversified portfolio the first time a worry arises.” I would call a 66% drop more than “a worry.” He makes it sound like us mere mortals are prone to overreaction, as though I jumped out of a moving car when the check engine light came on. Remember, a 66% loss would require nearly 200% gains just to get back to even—just to recoup the portion of your nest egg that it may have taken your entire life to save!

PTJ: You can invest for the long term, but you’re not going to necessarily be wealthy for the long term—because everything has a price and a central value over time. But it’s asking a lot, I think, of an average investor to understand valuation metrics all the time. The way that you guard against that—guard against the fact that maybe you’re not the most informed person of every asset class—is you run a diversified portfolio. TR: Of course. PTJ: Here’s a story I’ll never forget. It was 1976, I’d been working for six months, and I went to my boss, cotton trader Eli Tullis, and said, “I’ve got to trade, I’ve got to trade.” And he said, “Son, you’re not going to trade right now. Maybe in another six months I’ll let you.”


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

Alan Greenspan, asset-backed security, bank run, barriers to entry, Bretton Woods, business cycle, business logic, 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, Glass-Steagall Act, Home mortgage interest deduction, housing crisis, income inequality, invisible hand, It's morning again in America, late fees, London Interbank Offered Rate, low interest rates, market fundamentalism, means of production, mortgage debt, mortgage tax deduction, p-value, pattern recognition, post-Fordism, profit maximization, profit motive, risk/return, Ronald Reagan, Savings and loan crisis, Silicon Valley, statistical model, Tax Reform Act of 1986, technological determinism, technology bubble, the built environment, transaction costs, union organizing, white flight, women in the workforce, working poor, zero-sum game

Only the subsidies to GNMA, and not the total mortgages bought, would go on the books as a federal expense.26 Mortgage-backed securities initially came in two forms: the “modified pass-through” security and the “bond-like” security. Both forms gave the investor a claim on the monthly principal and interest payments of a large, diversified portfolio of mortgages. Both forms rendered the investor’s connection to the underlying assets completely anonymous and secondhand. The differences between them initially irked the mortgage banking industry, however. The pass-through security delivered the real monthly principal and interest payments of the portfolio, minus a servicing fee, to the investor.

More than just standardization, however, conventional mortgages could be traded because they were issued through mortgage-backed securities and not the old assignment system of the 1950s. While the FHA mortgage reduced investors’ risk by homogenizing standards, the FHLMC reduced risk by heterogeneous diversification. The mortgage-backed security came with a pre-diversified portfolio for a given interest rate, so that the investor did not need to cherry-pick mortgages across regions and neighborhoods. The risk of one bad loan could be diluted across many good loans in a mortgage-backed security’s underlying portfolio. Mortgage portfolios backing the securities brought enough diversification, it was believed, to overwhelm any outlying bad loan.

Investors wanted the reassurance that the unlimited tax-collecting resources of the federal government stood behind the securities, even if, legally, there was not an unlimited backstop. While GNMA and FNMA announced in their publications that the “full faith” of the U.S. government stood behind their issues, the reality fell far short of the promise— but for investors, it was close enough. Dangling promises, diversified portfolios, and foreclosable houses convinced many investors. The mortgage-backed security had come into its own and quickly began to define how mortgage funds flowed in the United States. By 1973, FHLMC was buying three times as many conventional mortgages as federally insured mortgages—nearly $1 billion in conventional mortgages.40 The next year, 1974, FHLMC further doubled its conventional mortgage activity to nearly $2 billion and shrunk its purchases of federally insured mortgages to $261 million.41 This rapid expansion into an uninsured market was made possible through FHLMC’s assiduous mimicry of the debt instruments of GNMA and FNMA, which continued through 1972 to deal primarily in federally insured mortgages.


pages: 1,239 words: 163,625

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

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

In contrast, even though the plant belonging to one of my portfolio companies, Hester Biosciences, was disrupted by that earthquake, I was able to comfortably weather the storm, because at the time, my portfolio consisted of many other businesses that were not affected at all. Sometimes, factors like currency depreciation or rising interest rates hurt some of our portfolio companies while benefiting others, so that the overall impact is muted. Most notably, if we invest in a diversified portfolio of good businesses, then most of the time the tailwinds pushing a few businesses forward will compensate for the headwinds pushing back the others, thus protecting us from permanent loss of capital. 3. Access to top-notch managers to run the business. When investing in the stock market, an investor gains access to top-notch managerial talent free of cost.

You are exchanging company-specific risk (unsystematic risk), which may be quite low, depending on the type of company in which you invest, for market risk (systematic risk). Risk hasn’t been reduced, it simply has been transferred from one form to another. Diversification of investments is touted as reducing both risk and volatility. Although a diversified portfolio indeed may reduce your overall level of risk, it also may correspondingly reduce your potential level of reward. The more extensively diversified an investment portfolio, the greater the likelihood is that it, at best, mirrors the performance of the overall market. Because many investors aim for better-than-market-average investment returns, it is important to have a clear understanding of diversification versus concentration in portfolio choices.

—Lee Ainslie Avoid extreme concentration like Buffett and Munger, unless you have very high expertise… If you can identify six wonderful businesses, that is all the diversification you need. And you will make a lot of money. And I can guarantee that going into a seventh one instead of putting more money into your first one is gotta be a terrible mistake. Very few people have gotten rich on their seventh best idea. —Warren Buffett A well-diversified portfolio needs just four stocks. —Charlie Munger instead, practice sufficient diversification… For an individual investor you want to own at least ten and probably fifteen and as many as twenty different securities. Many people would consider that to be a relatively highly concentrated portfolio.


pages: 436 words: 98,538

The Upside of Inequality by Edward Conard

affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Alan Greenspan, Albert Einstein, assortative mating, bank run, Berlin Wall, book value, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Climatic Research Unit, cloud computing, corporate governance, creative destruction, Credit Default Swap, crony capitalism, disruptive innovation, diversified portfolio, Donald Trump, en.wikipedia.org, Erik Brynjolfsson, Fall of the Berlin Wall, full employment, future of work, Gini coefficient, illegal immigration, immigration reform, income inequality, informal economy, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invention of the telephone, invisible hand, Isaac Newton, Jeff Bezos, Joseph Schumpeter, Kenneth Rogoff, Kodak vs Instagram, labor-force participation, Larry Ellison, liquidity trap, longitudinal study, low interest rates, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, mass immigration, means of production, meta-analysis, new economy, offshore financial centre, paradox of thrift, Paul Samuelson, pushing on a string, quantitative easing, randomized controlled trial, risk-adjusted returns, Robert Gordon, Ronald Reagan, Second Machine Age, secular stagnation, selection bias, Silicon Valley, Simon Kuznets, Snapchat, Steve Jobs, survivorship bias, The Rise and Fall of American Growth, total factor productivity, twin studies, Tyler Cowen, Tyler Cowen: Great Stagnation, University of East Anglia, upwardly mobile, War on Poverty, winner-take-all economy, women in the workforce, working poor, working-age population, zero-sum game

Nor does innovation create assets that risk-averse savers have typically demanded as collateral, namely assets that are easy to value and sell in the event of a default, such as real estate, inventory, credit card and other accounts receivables, and auto loans. Lenders have been far more reluctant to fund risky venture capital investments or expertise-driven companies with intangible assets—the types of companies that drive growth today—like consulting, accounting, and law firms that are difficult to value and sell. So far we have not seen diversified portfolios of risky hard-to-value venture investments funded with debt. Instead, we have seen an explosion of subprime mortgages in the United States, the construction of empty cities in China, and the funding of never-to-be-paid-back “government-guaranteed” Greek consumption by German-financed debt.

To have a significant impact on its market value, Google must acquire and successfully commercialize one-in-a-million breakthrough innovations after the market has revealed their viability rather than merely investing in a portfolio of unproven start-ups. For all these reasons—a decline in exogenously driven growth, a transition from capital to knowledge-intensity that accelerates obsolescence, innovation-driven growth that increases systematic and unsystematic risks, and a reluctance on the part of risk-averse savers to fund diversified portfolios of risky intangible investments—economic expansion today has less need for risk-averse savings and more need for equity to underwrite risk. Because of these changes, risk-averse savings—which demand others bear the risk of their use—tend to sit unused, even during periods of growth, for lack of equity willing to bear the risk of putting these savings to work.


Risk Management in Trading by Davis Edwards

Abraham Maslow, asset allocation, asset-backed security, backtesting, Bear Stearns, Black-Scholes formula, Brownian motion, business cycle, computerized trading, correlation coefficient, Credit Default Swap, discrete time, diversified portfolio, financial engineering, fixed income, Glass-Steagall Act, global macro, implied volatility, intangible asset, interest rate swap, iterative process, John Meriwether, junk bonds, London Whale, Long Term Capital Management, low interest rates, margin call, Myron Scholes, Nick Leeson, p-value, paper trading, pattern recognition, proprietary trading, random walk, risk free rate, risk tolerance, risk/return, selection bias, shareholder value, Sharpe ratio, short selling, statistical arbitrage, statistical model, stochastic process, systematic trading, time value of money, transaction costs, value at risk, Wiener process, zero-coupon bond

A weakness of the Sharpe Ratio/Information Ratio methodology is that scaling volatility with the square root of time requires a stable portfolio with independent price moves and constant volatility. In cyclical markets with mean reversion or variable volatility, this scaling won’t work well. As a result, these analytics work better for some trading strategies than others. For example, a diversified portfolio of assets that is bought and then held for a year might be well approximated by these assumptions. However, a macro-economic strategy that makes lightning fast, short term investments around infrequent news releases might have a harder time using Sharpe KEY CONCEPT: SHARPE RATIO AND INFORMATION RATIO Sharpe Ratio and Information Ratio compare risk and return by calculating average returns divided by the standard deviation of returns (volatility).

However, a large investment is not necessarily better or worse than a small investment. VAR does not describe worst‐case losses very well. VAR gives approximately the same level of detail on extreme events as other measures of size. For example, different risk managers might calculate an extreme loss scenario for one day loss on a $100,000 diversified portfolio of stocks as being between a 30 percent and 100 percent loss. Despite the wide range, all those estimates might be equally correct. VAR obscures detail. Any description of size by itself, like VAR, lacks important details. Knowing the size of a stock investment doesn’t give information like the geographic location of the company, its industry, or the specific challenges facing that stock.


pages: 381 words: 101,559

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

"World Economic Forum" Davos, Alan Greenspan, Asian financial crisis, bank run, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, buy and hold, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, currency manipulation / currency intervention, currency peg, currency risk, Daniel Kahneman / Amos Tversky, deal flow, Deng Xiaoping, diversification, diversified portfolio, Dr. Strangelove, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, Great Leap Forward, guns versus butter model, high net worth, income inequality, interest rate derivative, it's over 9,000, John Meriwether, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, Network effects, New Journalism, Nixon shock, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, one-China policy, open economy, paradox of thrift, Paul Samuelson, power law, price mechanism, price stability, private sector deleveraging, proprietary trading, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, short squeeze, sovereign wealth fund, special drawing rights, special economic zone, subprime mortgage crisis, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, vertical integration, War on Poverty, Washington Consensus, zero-sum game

So the sovereign wealth funds began to emerge to better manage these investments; the earliest SWFs were created some decades ago, but most have come into being in the past ten years, with their government sponsors giving them enormous allocations from their central bank reserves with a mandate to build diversified portfolios of investments from around the world. In their basic form, sovereign wealth funds do make economic sense. Most assets are invested professionally and contain no hidden political agenda, but this is not always the case. Some purchases are vanity projects, such as Middle Eastern investments in the McLaren, Aston Martin and Ferrari Formula 1 racing teams, while other investments are far more politically and economically consequential.

From the faculties of Yale, MIT and the University of Chicago came a torrent of carefully reasoned academic papers by future Nobel Prize winners such as Harry Markowitz, Merton Miller, William Sharpe and James Tobin. Their papers, published in the 1950s and 1960s, argued that investors cannot beat the market on a consistent basis and that a diversified portfolio that broadly tracks the market will produce the best results over time. A decade later, a younger generation of academics, including Myron Scholes, Robert C. Merton (son of famed sociologist Robert K. Merton) and Fischer Black, came forward with new theories on the pricing of options, opening the door to the explosive growth of financial futures and other derivatives contracts ever since.


pages: 340 words: 100,151

Secrets of Sand Hill Road: Venture Capital and How to Get It by Scott Kupor

activist fund / activist shareholder / activist investor, Airbnb, Amazon Web Services, asset allocation, barriers to entry, Ben Horowitz, Benchmark Capital, Big Tech, Blue Bottle Coffee, carried interest, cloud computing, compensation consultant, corporate governance, cryptocurrency, discounted cash flows, diversification, diversified portfolio, estate planning, family office, fixed income, Glass-Steagall Act, high net worth, index fund, information asymmetry, initial coin offering, Lean Startup, low cost airline, Lyft, Marc Andreessen, Myron Scholes, Network effects, Paul Graham, pets.com, power law, price stability, prudent man rule, ride hailing / ride sharing, rolodex, Salesforce, Sand Hill Road, seminal paper, shareholder value, Silicon Valley, software as a service, sovereign wealth fund, Startup school, the long tail, Travis Kalanick, uber lyft, VA Linux, Y Combinator, zero-sum game

Banks would continue to play a significant role in the direct financing of many startup businesses until the 1930s passage of the Glass-Steagall Act restricted these activities. Today, VC firms exist by the grace of limited partners who invest some of their own funds into specific VC funds. Limited partners do this because, as part of their desire to maintain a diversified portfolio, venture capital is intended to produce what investment managers refer to as alpha—excess returns relative to a specific market index. Though each LP may have its own benchmark to measure success, common benchmarks are the S&P 500, Nasdaq, or Russell 3000; many LPs will look to generate excess returns of 500–800 basis points relative to the index.

Insurance providers, of course, worry about the same—if inflation exceeds the returns on their investments, the real purchasing power of their assets declines and can make it difficult for them to be able to pay out insurance claims in the future. But in trying to increase the real value of their investments, LPs don’t just invest in VCs; they construct a diversified portfolio around a defined asset allocation to try to achieve their return goals, but within a defined volatility (or risk) framework. Where LPs Invest Generally speaking, the types of investments to which LPs allocate capital fall into three big buckets: Growth assets—These are investments intended (as the name suggests) to earn returns in excess of what less risky assets (bonds and cash) are expected to earn.


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

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

Studies find that retail investors (especially men) tend to sell stocks that go on to outperform the market and tend to buy stocks that subsequently underperform the market.32 We also tend to trade too often. Buying and holding a diversified portfolio is a better strategy for most investors. Evidently we know less than we think we do when we’re buying and selling stocks. In any event, there is some common ground between a diversified portfolio and buying what we know. We can invest in what we know to diversify our portfolio and find a good balance between risk and reward. Gloria Estefan, for example, told me that she knew from the beginning of her career that women singers “have a much shorter shelf life in this industry,” and that fans’ tastes can be fickle.


pages: 261 words: 103,244

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

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

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

If such firms face a tradeoff between increasing their chances of becoming (and remaining) trustee and making the optimal investment choices for their clients, the profit-maximizing choice is simple. They do the bidding of MONEY IS POWER 57 the company that has the power to name the trustee. The retirement savers would benefit from having a diversified portfolio. In particular, they should not be overinvested in the stock of their employer since they already face the risk of low income or job loss if their employer should fare badly. However, the company has an interest in having its stock price pumped up by increasing demand. In addition, it is very convenient for the top management of the companies involved to have a large share of their stock in the hands of fund managers who want to curry favor with them.


pages: 304 words: 22,886

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

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

In particular, those who are required to take the employer’s match in the form of company stock allocate 29 percent of their discretionary contributions—that is, the money they have control over—to company stock. By contrast, those who have the option, but not the requirement, to take the employer’s match in the form of company stock allocate only 18 percent of their own funds to company stock.10 How risky is it to hold the shares of a single stock rather than a diversified portfolio? According to estimates by the economist Lisa Meulbroek (2002), a dollar in company stock is worth less than half the value of a dollar in a mutual fund! In other words, when firms foist company stock onto their employees, it is like paying them fifty cents on the dollar. The upshot is that, in general, workers would be much better off with a diversified mutual fund than with company stock.

First, even if firms recognize that company stock is not so great for employees, they do not want all or most employees to sell their stock at once, for fear that such sales will lower the stock’s price. Second, firms do not want to be signaling that they think their stock is a bad investment. The Sell More Tomorrow plan gives employees the option to sell off their shares gradually over a period of time (say, three years), with the proceeds directed into a diversified portfolio. The program could be done on either an opt-in or opt-out basis. Nudges Through better choice architecture, plans can help their participants on many dimensions. Attention to choice architecture has become increasingly important over the years because plans have greatly increased the number of options they offer, making it even harder for people to choose well.


pages: 130 words: 32,279

Beyond the 4% Rule: The Science of Retirement Portfolios That Last a Lifetime by Abraham Okusanya

asset allocation, diversification, diversified portfolio, high net worth, longitudinal study, low interest rates, market design, mental accounting, Paul Samuelson, quantitative easing, risk tolerance, risk-adjusted returns, Robert Shiller, seminal paper, tail risk, The 4% rule, transaction costs, William Bengen

Retirees may sacrifice some lifestyle and legacy goals to secure their essential income Upside • Flexibility • Higher income and legacy if market turns out to be favourable Essential income not subject to vagaries of the market Retirement income product • Diversified investment portfolios • Annuity for essential spending • Investment-linked annuity • Diversified portfolios only used for discretionary spending Risk profile Medium to high Low to medium Flexibility to income adjustment Medium to high Low to medium Maintenance High Low Difficulty Complex Simple Modern Portfolio Theory vs. Modern Retirement Theory The empirical foundation for the probability-based school is the seminal paper published in the Journal of Financial Planning in 19945 by engineer-turned-financial planner, William Bengen.


Capital Ideas Evolving by Peter L. Bernstein

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

His scheme has roots in CAPM but turns important parts of CAPM on their heads. The path to the solution struck Leibowitz quite by accident in 2003, when he happened to be preparing for a presentation to a large group of endowment fund managers. This particular group had been in the forefront of diversifying portfolios away from the traditional stock–bond mix into a much wider range of asset classes such as real estate investment trusts (REITs), direct investments in real estate, hedge funds, private equity, venture capital, and, to a lesser extent, direct investments in raw materials such as oil and timber.

Litterman goes on to explain further: “If, for example, you expect a Sharpe Ratio of only 0.25, which is the approximate Sharpe Ratio of the equity market, then you should allocate your risk equally between beta and active risk. If you expect a Sharpe Ratio above 0.5—a return as high as one-half the volatility you experience—then clearly you want active risk to be the dominant risk in your portfolio.” Conservative investors holding a diversified portfolio half in equities and half in fixed-income can expect positive returns in the long run, but need to be realistic. Litterman’s group estimates the long-run equity premium at about 3 to 4 percentage points above bonds, although many economists currently expect less than that. This 50–50 portfolio, then, would create a real (inf lation-adjusted) return of roughly 1.5 percent to 2.0 percent over the long run—before fees and taxes.


pages: 311 words: 17,232

Living in a Material World: The Commodity Connection by Kevin Morrison

addicted to oil, Alan Greenspan, An Inconvenient Truth, barriers to entry, Berlin Wall, biodiversity loss, carbon credits, carbon footprint, carbon tax, clean water, commoditize, commodity trading advisor, computerized trading, diversified portfolio, Doha Development Round, Elon Musk, energy security, European colonialism, flex fuel, food miles, Ford Model T, Great Grain Robbery, Gregor Mendel, Hernando de Soto, Hugh Fearnley-Whittingstall, hydrogen economy, Intergovernmental Panel on Climate Change (IPCC), junk bonds, Kickstarter, Long Term Capital Management, managed futures, Market Wizards by Jack D. Schwager, Michael Milken, new economy, North Sea oil, oil rush, oil shale / tar sands, oil shock, out of africa, Paul Samuelson, peak oil, planned obsolescence, price mechanism, Ronald Coase, Ronald Reagan, Silicon Valley, sovereign wealth fund, the payments system, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, uranium enrichment, vertical integration, young professional

Fund returns had taken a nose dive after a vast number of investors had piled their money into over-valued technology companies; highly leveraged telecom and dot com companies that were running out of cash. The academic theory of portfolio diversification has actually been around since the 1950s, when Harry Markowitz developed the modern portfolio theory, which essentially highlighted the need to build a diversified portfolio. At that time though, Markowitz was still mainly focused on bonds and equities. The theory took another step in the early 1980s when Dr John Lintner of Harvard University concluded in his study that, ‘The combined portfolios of stocks, after including judicious investments in managed futures accounts, show substantially less risk, at every possible level of expected return, than portfolios of stocks (or stocks and bonds) alone’ (Lintner, 1983).

Speculators were blamed for driving down agriculture prices in the late 19th century and increasing commodity prices in the early 21st century. Neither accusation was correct; prices reflect the nature of supply and demand. With greater focus on commodities from an economic and political point, they will continue to form part of a diversified portfolio as new commodity investment products are launched in more markets. Like any market though, commodities will reach a point where prices are excessive when compared to the underlying supply and demand. A good signal of that is when there is too much attention on commodities on television, the internet and in newspapers.


pages: 375 words: 105,067

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

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

It might not resonate as much as it did a decade ago (Tigrent, after all, admits that revenues dropped significantly between 2009 and 2010 before they ceased reporting their numbers altogether as competitive pressures ranging from other wealth seminars to the ongoing recession led the company to drop the price of their classes), but there are still many people who believe in the magic of what Kiyosaki is promoting. Kiyosaki gets at a truth that more reputable people in the financial services world have trouble grasping: many people don’t believe the stock market is capable of doing what other financial advisers claim. “Invest your money for the long term in a well diversified portfolio of mutual funds? Send it straight to Wall Street so that they can pay their brokers $10 million a year in bonuses? I mean, how stupid does a person have to be?” he said in a recent Time magazine interview. Knowing what we do about the state of the American retirement system, he has a point, if not the solution.

that people could short stocks on a margin account: Chuck Jaffe, “Stupid Investment of the Week: Dads (or Moms) Won’t Get Rich from This Book’s Advice,” Market Watch, October 9, 2009, http://articles.marketwatch.com/2009-10-09/investing/30745209_1_vibrant-online-community-financial-education-conspiracy-theories.to quote from the press release announcing the deal: “Infomercial Company to Modify Business Practices, Reimburse Dissatisfied Customers, Attorney General Bill McCollum,” News Release, January 10, 2008, http://myfloridalegal.com/newsrel.nsf/newsreleases/BB082469E432ABD6852573CC0054A7C3. In a 2003 interview with Smart Money: Eleanor Laise, “Karma Chameleon,” Smart Money, February, 2003. “Invest your money for the long term in a well-diversified portfolio”: “10 Questions for ‘Rich Dad, Poor Dad’ Author Robert Kiyosaki—Video—TIME.com”, http://www.time.com/time/video/player/0,32068,28344410001_1908587,00.html. “The problem I sense today,” as he writes in Rich Dad, Poor Dad: Kiyosaki and Lechter, Rich Dad, Poor Dad, 55. “I didn’t want to be a millionaire, but owning a little wedge of real estate”: Carol Lloyd, “Rich House, Poor House,” San Francisco Chronicle, July 22, 2005, http://www.sfgate.com/cgi-bin/article.cgi?


pages: 403 words: 110,492

Nomad Capitalist: How to Reclaim Your Freedom With Offshore Bank Accounts, Dual Citizenship, Foreign Companies, and Overseas Investments by Andrew Henderson

Affordable Care Act / Obamacare, Airbnb, airport security, Albert Einstein, Asian financial crisis, asset allocation, bank run, barriers to entry, birth tourism , bitcoin, blockchain, business process, call centre, capital controls, car-free, content marketing, cryptocurrency, currency risk, digital nomad, diversification, diversified portfolio, Donald Trump, Double Irish / Dutch Sandwich, Elon Musk, failed state, fiat currency, Fractional reserve banking, gentrification, intangible asset, land reform, low interest rates, medical malpractice, new economy, obamacare, offshore financial centre, passive income, peer-to-peer lending, Pepsi Challenge, place-making, risk tolerance, side hustle, Silicon Valley, Skype, too big to fail, white picket fence, work culture , working-age population

In doing so, the European Union screwed everyone with more than €100,000 to their name, essentially taking their funds to pay for the woes of the Cypriot government. The hard truth is that what happened in Cyprus can happen anywhere. We will talk about specifics in the chapter on offshore banking, but suffice it to say that having only 10% of your money in Cyprus would hurt a heck of a lot less than having all of it there. On the other hand, a diversified portfolio of citizenships and investments can only benefit you. When I convinced my father to buy Yahoo! stock at $25 in 1996, he did not complain after selling it at $50 and watching it go to the moon. Combined with his risk profile, he used the information he had at the time to make the best decision for him.

Skipping the Asian Financial Crisis of the 1990s, the tech bubble of the early 2000s and the Global Financial Crisis of 2008, Cambodia’s economy has shrugged off the rest of the world’s problems. So, while frontier markets may be risky by one account, they can also be an important part of a diversified portfolio. An entrepreneur who spreads their risk by placing some capital in overlooked markets that are in their infancy will be better off than those who place all their capital in ‘developed’ markets that are all susceptible to global financial crises. Obviously, there are challenges, but if you know what you are doing or you have someone who can do it for you, you can enjoy uncorrelated growth even while the rest of the world suffers.


pages: 363 words: 109,834

The Crux by Richard Rumelt

activist fund / activist shareholder / activist investor, air gap, Airbnb, AltaVista, AOL-Time Warner, Bayesian statistics, behavioural economics, biodiversity loss, Blue Ocean Strategy, Boeing 737 MAX, Boeing 747, Charles Lindbergh, Clayton Christensen, cloud computing, cognitive bias, commoditize, coronavirus, corporate raider, COVID-19, creative destruction, crossover SUV, Crossrail, deep learning, Deng Xiaoping, diversified portfolio, double entry bookkeeping, drop ship, Elon Musk, en.wikipedia.org, financial engineering, Ford Model T, Herman Kahn, income inequality, index card, Internet of things, Jeff Bezos, Just-in-time delivery, Larry Ellison, linear programming, lockdown, low cost airline, low earth orbit, Lyft, Marc Benioff, Mark Zuckerberg, Masayoshi Son, meta-analysis, Myron Scholes, natural language processing, Neil Armstrong, Network effects, packet switching, PageRank, performance metric, precision agriculture, RAND corporation, ride hailing / ride sharing, Salesforce, San Francisco homelessness, search costs, selection bias, self-driving car, shareholder value, sharing economy, Silicon Valley, Skype, Snapchat, social distancing, SoftBank, software as a service, statistical model, Steve Ballmer, Steve Jobs, stochastic process, Teledyne, telemarketer, TSMC, uber lyft, undersea cable, union organizing, vertical integration, WeWork

It lifts because we have found that the end is not nigh. However, hang on long enough to stock in a rapidly growing company, and you will live through the inevitable painful readjustment of expectations to slower growth. If you are a very long-term investor and reinvest all your gains in a diversified portfolio, all you should expect is about a gain of 7 percent per year. If you are a speculator, you can ride a growth wave, and your job is to get out before it stops. This is not always easy, as hope springs eternal. For a growing business, the market is always discounting the chance that the end of the good times is nigh.

But you should not confuse such “owners” with those who are interested in the value of the company rather than the fluctuations in its stock price. In a 2001 study, Brian Bushee found that among institutional investors, what he termed “transient” investors were associated with overweighting the near-term earnings.10 By “transient” he meant very diversified portfolios with high portfolio turnover. Institutions with narrower, more focused holdings seemed not to have this short-term bias. In another interesting study, Kim et al. found that when a company stopped offering earning guidance, its clientele shifted to longer-term investors.11 The board of directors can be crucial.


pages: 367 words: 110,161

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

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

Despite this unequivocal statement, he was about to charge in the opposite direction, in concert with a new authority figure in his life; his own animal spirits, and Pimco’s, were soaring. * * * As CEO, this was Mohamed El-Erian’s mandate: find where Pimco could expand. He planned to bring the diversified-portfolio approach he’d overseen at Harvard Management Company to Pimco, by spreading money across products with different types of risks, the sum of which should have a lower overall risk profile than if all the investment eggs were in one basket. Pimco was definitionally heavy in the bond basket, which had just experienced an unprecedented run-up.

They color coded the responses: green indicated something Pimco should get into, but wasn’t doing yet; yellow meant something was complementary to what the firm already did but required additional resources. Red: don’t do it. Pimco put the returned matrices on top of one another for a color-coded “road map,” El-Erian said. The road map would show them where to go, how to achieve that optimal “diversified portfolio,” customized by Pimco’s clients, for Pimco’s clients. Green: asset-allocation funds, which invest across strategies, for diversification. Direct private equity investments were red. Equities were yellow: maybe do it. Yes, sure, Gross had publicly slagged stocks over the decades. But it was usually for show, or an emotional response, the kind he still couldn’t control in interviews even after all these years of speeches and TV appearances.


pages: 151 words: 38,153

With Liberty and Dividends for All: How to Save Our Middle Class When Jobs Don't Pay Enough by Peter Barnes

adjacent possible, Alfred Russel Wallace, banks create money, basic income, Buckminster Fuller, carbon tax, collective bargaining, computerized trading, creative destruction, David Ricardo: comparative advantage, declining real wages, deindustrialization, diversified portfolio, driverless car, en.wikipedia.org, Fractional reserve banking, full employment, Glass-Steagall Act, hydraulic fracturing, income inequality, It's morning again in America, Jaron Lanier, Jevons paradox, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, land reform, Mark Zuckerberg, Money creation, Network effects, oil shale / tar sands, Paul Samuelson, power law, profit maximization, quantitative easing, rent-seeking, Ronald Coase, Ronald Reagan, Silicon Valley, sovereign wealth fund, Stuart Kauffman, the map is not the territory, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Tyler Cowen, Tyler Cowen: Great Stagnation, Upton Sinclair, Vilfredo Pareto, wealth creators, winner-take-all economy

Employee stock ownership plans are a step in this direction, and Kelso’s breakthrough was to create a way to finance them (through trusts that buy stock on credit) and get them favorable tax treatment. ESOPs, however, have two limitations: they’re limited to workers in companies that choose to adopt them, and they suffer from the fact that putting all one’s eggs in a single company’s stock isn’t as safe as putting them in a diversified portfolio. A larger leap toward broad stock ownership would be a plan that covered everyone and included stock in a broad assortment of companies.6 Just such a plan was proposed in 2007 by Dwight Murphey, a follower of free-market economist Ludwig von Mises. Unlike many conservatives, who blame the poor themselves and government programs for poverty, Murphey acknowledges that most modern poverty is due to a lack of jobs that pay well.


pages: 393 words: 115,217

Loonshots: How to Nurture the Crazy Ideas That Win Wars, Cure Diseases, and Transform Industries by Safi Bahcall

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, AOL-Time Warner, Apollo 11, Apollo 13, Apple II, Apple's 1984 Super Bowl advert, Astronomia nova, behavioural economics, Boeing 747, British Empire, Cass Sunstein, Charles Lindbergh, Clayton Christensen, cognitive bias, creative destruction, disruptive innovation, diversified portfolio, double helix, Douglas Engelbart, Douglas Engelbart, Dunbar number, Edmond Halley, Gary Taubes, Higgs boson, hypertext link, industrial research laboratory, invisible hand, Isaac Newton, Ivan Sutherland, Johannes Kepler, Jony Ive, knowledge economy, lone genius, Louis Pasteur, Mark Zuckerberg, Menlo Park, Mother of all demos, Murray Gell-Mann, PageRank, Peter Thiel, Philip Mirowski, Pierre-Simon Laplace, power law, prediction markets, pre–internet, Ralph Waldo Emerson, RAND corporation, random walk, reality distortion field, Richard Feynman, Richard Thaler, Sheryl Sandberg, side project, Silicon Valley, six sigma, stem cell, Steve Jobs, Steve Wozniak, synthetic biology, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tim Cook: Apple, tulip mania, Wall-E, wikimedia commons, yield management

More projects and more funding increase the odds of more hits—the positive feedback loop of a chain reaction. How many projects are needed to achieve critical mass? Suppose the odds are 1 in 10 that any one loonshot will succeed. Critical mass to ignite that reaction with high confidence requires investing in at least two dozen such loonshots (a diversified portfolio of ten of those loonshots has a 65 percent likelihood of producing at least one win; two dozen, a 92 percent likelihood). To see how these three conditions apply to industries—between companies rather than inside a company—let’s start with film. We’ll see how the federal government helped separate the phases (#1).

The philosopher David Hume argued around the same time that Montesquieu’s ideas were absurd, and that the true cause was the West’s inherently superior race (Golinski, 175–78). Both ideas, along with variations (superior culture, religion, etc.), have persisted for over two hundred years. at least two dozen such loonshots: A diversified portfolio of ten loonshots, each with a one in ten chance of success, has a 65 percent likelihood of producing at least one win because the likelihood that all ten will fail is 0.9 to the tenth power: 35 percent. A portfolio of two dozen has a 92 percent likelihood of producing at least one win because the likelihood that all 24 will fail is 8 percent.


pages: 402 words: 110,972

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

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

Given the 20-minute rule for these talks, none of them were as voluminous as this chapter. Still, this is not intended in any way to be a complete history of market technology, but rather an easily digestible introduction. I occasionally still do these talks on what remains of greater Wall Street. I am also open to weddings, quinceañeras, and bar mitzvahs, since we all need diversified portfolios these days. Looking into the workings of modern securities markets is like looking under the hood of a Prius hybrid car. There are so many complex and obscure parts it’s hard to discern what’s going on. If you look under the hood of an auto from a simpler era, for example a ’64 Mustang, you can see the parts and what they do, and have a better chance at understanding their complex modern replacements.

We need to put them all together in a portfolio of balanced, prudent bets to enhance the index return, and to adjust the portfolio periodically. This is where the idea of portfolio optimization comes in. Behind the math and the Nobel Prizes,8 portfolio optimization is about trading off risk and reward to produce a diversified portfolio. Thirty years ago, this was considered a crackpot idea. In Capital Ideas (Free Press, 1993), Peter L. Bernstein includes a story of young Bill Sharpe wandering Wall Street in the 1960s, trying to shake loose enough computer time to run a small optimization. Most people thought he was a crackpot.


pages: 354 words: 118,970

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

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

It demonstrated that the overall riskiness of a stock portfolio depended on how much the portfolio’s stocks moved up and down in the markets in relation to one another: the more closely attuned to one another they were, the riskier the portfolio would be. One could simplify this into the idea that one should build a diversified portfolio, but truly applying Markowitz’s model required an enormously complicated series of calculations based on equations he had devised; one had to figure out how related the movement of every stock in a portfolio was to the movement of every other stock. Peter Bernstein, in his book Capital Ideas, estimated that a portfolio of two thousand holdings would require more than two million separate calculations.

.; see also corporations; federal government; Organization Man insurance companies Intel Interest Equalization Tax interest groups; desire to eliminate; successes of; types of interest rates; deregulation and; Greenspan and; inflation and; on mortgages Internal Revenue Service International Nickel International Typographical Union Internet; bubble of 2000; early conceptions of; financial industry on; as predicted in fiction; regulation of; see also networks; Silicon Valley interstate banking Interstate Commerce Commission Investing in US investment banking; academic paradigm shift in; antitrust suit against; changes to in 1970s; commercial banking vs.; computerization of; deregulation of, see deregulation; diversified portfolios in; Glass-Steagall Act and, see Glass-Steagall Act; SEC and, see Securities and Exchange Commission; shifting clients of; see also Morgan Stanley; specific financial instruments Irish Americans Italian Americans Itô, Kiyosi ITT Jackson, Andrew Jackson, Jesse Jackson, Mahalia Jacobs, Irwin Japan; auto industry in Jdate Jefferson, Thomas Jensen, Michael; as advocate for free markets; background of; character of; corporations studied by; at Harvard; on integrity; in Landmark; mind shift of; at Rochester; at University of Chicago Jensen, Stephanie Jews; in finance Jhering, Rudolf von Jobs, Steve Johns Hopkins University Johnson, Earl Johnson, Jonathan Jones, Doug Journal of Applied Corporate Finance Journal of Financial Economics J.P.


Battling Eight Giants: Basic Income Now by Guy Standing

basic income, Bernie Sanders, carbon tax, centre right, collective bargaining, decarbonisation, degrowth, diversified portfolio, Donald Trump, Elon Musk, Extinction Rebellion, full employment, future of work, Gini coefficient, income inequality, Intergovernmental Panel on Climate Change (IPCC), job automation, labour market flexibility, Lao Tzu, longitudinal study, low skilled workers, Martin Wolf, Mont Pelerin Society, moral hazard, North Sea oil, offshore financial centre, open economy, pension reform, precariat, quantitative easing, rent control, Ronald Reagan, selection bias, universal basic income, Y Combinator

Appendix A 89 (3) Alaska Permanent Fund Alaska has a common-dividend-type scheme, which is often lauded as ‘the most popular program in the history of the US’.4 The Alaska Permanent Fund was set up in 1976 by the maverick Republican state governor with royalties from the oil industry. It began issuing dividends to all state residents in 1982, on an individual basis, and is still going today. By 2018, the fund was worth 113% of Alaska’s GDP, and over the years its diversified portfolio yielded annual returns of nearly 10%.5 Anything like that from a Commons Fund in the UK would make a decent basic income eminently affordable within the lifetime of a single parliament. Dividends from the Alaska fund have reduced poverty and economic insecurity. They have also been associated with increased employment and improved schooling attainment by disadvantaged youth.


pages: 621 words: 123,678

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

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

A total market fund tracks (that is to say, tries to match) the performance of the U.S. stock market by investing in over two thousand stocks in the United States. An S&P 500 fund is similar but tracks only shares of the top five hundred largest companies in the United States. Because they contain such a broad array of stocks, total stock market index funds allow you to easily invest in a diversified portfolio, and because they are passively managed, they typically have very low management fees and are tax efficient (both of which increase your future returns). Investing in index funds also gives you the opportunity to receive dividends (cash payments) from those stocks that issue them, which help to generate consistent investment gains.

These can also be used to meet your target asset allocation in your IRA. Also note that where there is no percentage recommendation for a particular type of fund, it is because I don’t recommend these investments (e.g., income equity funds and international bond funds) if the others are present. You can use this chart as a starting point to create your own diversified portfolio. You can ignore all of the other options—things like gold and REITs (real estate investment trusts) in your 401(k)s, 403(b)s, or IRAs. While they can add diversification, they aren’t really necessary and you are better off focusing just on stocks and bonds in your asset allocation. Keep it simple using total stock market, S&P 500, and total bond market index funds when you can.


Hedgehogging by Barton Biggs

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

As I said before, the Eu- ccc_biggs_ch05_46-62.qxd 12/7/05 3:06 PM Page 55 The Odyssey of Starting a Hedge Fund 55 ropeans supposedly are the worst but the truth is everyone in this business is performance happy. Considering the fees they are paying, why shouldn’t they be? A fund of funds typically selects and manages a diversified portfolio of hedge funds that it sells to individuals or institutions that don’t feel capable of making the choices and then monitoring the funds themselves.They run all kinds of analytics on the individual hedge funds and on their overall portfolio to monitor risk and exposures.A couple of years ago, LTCM, a big hedge fund run by a bunch of pointy-headed Nobel Prize economists, blew up when a series of three standard-deviation events occurred simultaneously.

As a result, Harvard Management has blown apart, with Jack Meyer, who was the mastermind, and most of the stars leaving to set up their own hedge funds. It is not clear how Harvard Management will be put back together again.Yale is incredibly fortunate. David and Dean stick to five basic principles. First, they strongly believe in equities. As investors, they want to be owners, not lenders. Second, they want to hold a diversified portfolio. Their conviction is that Yale can more effectively reduce risk by limiting aggregate exposure to any single asset class rather than by attempting to time markets. Despite the professionalism of the Yale staff, no attempt is made to finetune allocations until valuations become very extreme.The third principle is that greater incremental returns are achievable in selecting superior managers in nonpublic markets that are characterized by incomplete information and illiquidity.


pages: 386 words: 122,595

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

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

If there had been a disruption serious enough to cancel the World Cup, the investors lose some or all of their money, which is used instead to compensate the World Football Federation for the lost revenue. The beauty of these products lies in the way they spread risk. The party selling the bonds avoids ruin by sharing the costs of a natural disaster or a terrorist attack with a broad group of investors, each of whom has a diversified portfolio and will therefore take a relatively small hit even if something truly awful happens. Indeed, one role of the financial markets is to allow us to spread our eggs around generously. I must recount one of those inane experiences that can happen only in high school. Some expert in adolescent behavior at my high school decided that students would be less likely to become teen parents if they realized how much responsibility it required.

When it’s all over and things stabilize I think we’ll find the overall long-run performance [of the endowment] is better than if we didn’t.”12 I suspect he’s right, but that doesn’t necessarily make it a wise strategy for my mother-in-law. Diversify. When I teach finance, I like to have my students flip coins. It is the best way to make certain points. Here is one of them: A well-diversified portfolio will significantly lower the risk of serious losses without lowering your expected return. Let’s turn to the coins. Suppose the return on the $100,000 you have tucked away in a 401(k) depends on the flip of a coin: Heads, it quadruples in value; tails, you lose everything. The average outcome of this exercise is very good.


pages: 416 words: 39,022

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

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

The first two indicators are based on the market straight-line equation and the CAPM equation respectively; the third is a variation on the second. 3.3.3.2 Sharpe index The market straight-line equation is: EP = RF + EM − RF · σP σM which can be rewritten as follows: EM − RF EP − RF = σP σM This relation expresses that the excess return (compared to the risk-free rate), standardised by the standard deviation, is (in equilibrium) identical to a well-diversified portfolio and for the market. The term Sharpe index is given to the expression SIP = EP − RF σP which in practice is compared to the equivalent expression calculated for a market representative index. Example Let us take the data used for the simple Sharpe index model (Section 3.2.4): E1 = 0.05 σ1 = 0.10 ρ12 = 0.3 E2 = 0.08 σ2 = 0.12 ρ13 = 0.1 E3 = 0.10 σ3 = 0.15 ρ23 = 0.4 Let us then consider the specific portfolio relative to the value λ = 0.010 for the risk parameter.

The Treynor index for this portfolio is therefore obtained by: TI P = 0.0758 − 0.03 = 0.0469 0.9774 meanwhile, the index relative to the index is TI I = 0.04 − 0.03 = 0.0100 1 This will lead to the same conclusion. 3.3.3.4 Jensen index According to the reasoning in the Treynor index, we have EP − RF = βP (EM − RF ). This relation being relative (in equilibrium) for a well-diversified portfolio, a portfolio P will present an excess of return in relation to the market if there is a number αP > 0 so that: EP − RF = αP + βP (EM − RF ). The Jensen index, JI P = α̂, is the estimator for the constant term of the regression: EP ,t − RF,t = α + β (EI,t − RF,t ). For this, the variable to be explained (explanatory) is the excess of return of portfolio in relation to the risk-free rate (excess of return of market representative index).


pages: 461 words: 128,421

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

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

Fisher admitted that neither he nor anyone else he knew of had “definitely formulated” this principle (that would have to wait until Harry Markowitz in 1952). But then Fisher twisted his reasonably sound advice into a distinctly dodgy apologia for high stock prices: Because so many investors now held well-diversified portfolios, they were willing to venture into risky stocks that previously would have interested only speculators. “This enlightened process has created a tremendous new market for securities that in times past would have gone begging,” Fisher wrote. “It constitutes a permanent reason why this plateau [of stock prices] will not sink again to the level of former years except for extraordinary cause.”32 THROUGHOUT THE 1920S BOOM, ROGER Babson kept staring at his Babsoncharts and William Peter Hamilton at his Dow charts.

“No buyer considers all securities equally attractive at their present market prices whatever these prices happen to be,” Williams wrote in the first page of the book, “on the contrary, he seeks ‘the best at the price.’” Markowitz was dubious. Graham and Dodd exhorted their readers to hold a diversified portfolio, although they didn’t go deeply into the hows or whys. As he read further in The Theory of Investment Value, Markowitz saw that even Williams assumed that investors would own many securities. Someone who was truly out to buy only “the best at the price” would only buy one stock—the best one.


pages: 349 words: 134,041

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

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

Senior note holders take a smack only if the DAS_C10.QXD 5/3/07 7:59 PM Page 287 9 C re d i t w h e re c re d i t i s d u e – f u n w i t h C D S a n d C D O 287 losses on the underlying loans are above the equity and mezzanine amounts. The mezzanine and equity investors receive a high return in return for accepting the higher risk. This is tranching. CDO tranching is the black art of dissimulation. Investors are told that they are getting access to a ‘diversified’ portfolio of credit risk and are promised highly customized credit risk. It’s all very clever ‘spin’. The portfolio on which the CDO is based is generally ‘diversified’. For example, a $1,000 million portfolio might be made up of 100 loans of $10 million each. Each loan is to a different entity; the portfolio is diversified; if you buy the senior notes then you are also diversified.

There were capital guaranteed hedge fund investments – you couldn’t lose your principal although you may end up earning nothing on your investment for ten years. AI gained traction. Many ordinary investors were now paying several layers of fees: there was the fee to their mutual fund, there was a fee to the DAS_Z01.QXP 8/11/06 2:10 PM Page 309 Epilogue 309 FoF manager, then there was the hedge fund manager’s fee. The idea of a diversified portfolio of hedge funds didn’t make sense, all the diversification did was to average out the returns. The idea of a capital guaranteed hedge fund was a contradiction in terms. You either were willing to take the risk or not. Dealers loved hedge funds. Investment banks helped set them up, invested in them and traded with them.


pages: 892 words: 91,000

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

accelerated depreciation, activist fund / activist shareholder / activist investor, air freight, ASML, barriers to entry, Basel III, Black Monday: stock market crash in 1987, book value, BRICs, business climate, business cycle, business process, capital asset pricing model, capital controls, Chuck Templeton: OpenTable:, cloud computing, commoditize, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, currency risk, discounted cash flows, distributed generation, diversified portfolio, Dutch auction, energy security, equity premium, equity risk premium, financial engineering, fixed income, index fund, intangible asset, iterative process, Long Term Capital Management, low interest rates, market bubble, market friction, Myron Scholes, negative equity, new economy, p-value, performance metric, Ponzi scheme, price anchoring, proprietary trading, purchasing power parity, quantitative easing, risk free rate, risk/return, Robert Shiller, Savings and loan crisis, shareholder value, six sigma, sovereign wealth fund, speech recognition, stocks for the long run, survivorship bias, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, two and twenty, value at risk, yield curve, zero-coupon bond

This section provides our fundamental assumptions, background on the important issues, and a practical way to estimate the components of the cost of capital. General Guidelines Our analysis adopts the perspective of a global investor—either a multinational company or an international investor with a diversified portfolio. Of course, some emerging markets are not yet well integrated with the global market, and local investors may face barriers to investing outside their home market. As a result, local investors cannot always hold well-diversified portfolios, and their cost of capital may be considerably different from that of a global investor. Unfortunately, there is no established framework for estimating the capital cost for local investors.

Woolridge, “Some New Evidence That Spinoffs Create Value,” Journal of Applied Corporate Finance 7 (1994): 100–107. 566 CORPORATE PORTFOLIO STRATEGY management believed that the challenges and opportunities of the two businesses were different enough that they would be better managed as separate companies. THE MYTH OF DIVERSIFICATION A perennial question in corporate strategy is whether companies should hold a diversified portfolio of businesses. The idea seemed to be discredited in the 1970s, yet some executives still say things like “It’s the third leg of the stool that makes a company stable.” Our perspective is that diversification is intrinsically neither good nor bad; which it is depends on whether the parent company adds more value to the businesses it owns than any other potential owner could, making it the best owner of those businesses in the circumstances.

Provide examples of how the best owner of a business has changed over time. Give reasons for these changes. 5. Explain how and why the best owner of a business might change over time. 6. What are the steps involved in constructing a portfolio? Discuss potential hurdles in executing the analytic approach. 7. Should a company operate a diversified portfolio of businesses? What are the arguments for and against? 8. What are the benefits to society when a business is owned by its best owner? 26 Performance Management The overall value that a company creates is the sum of the outcomes of innumerable business decisions that its managers and staff take at every level, from choosing when to open the door to customers to deciding whether to acquire a new business.


pages: 209 words: 53,175

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

airport security, Amazon Web Services, Bernie Madoff, book value, business cycle, computer age, Cornelius Vanderbilt, coronavirus, discounted cash flows, diversification, diversified portfolio, do what you love, Donald Trump, financial engineering, financial independence, Hans Rosling, Hyman Minsky, income inequality, index fund, invisible hand, Isaac Newton, It's morning again in America, Jeff Bezos, Jim Simons, John Bogle, Joseph Schumpeter, knowledge worker, labor-force participation, Long Term Capital Management, low interest rates, margin call, Mark Zuckerberg, new economy, Paul Graham, payday loans, Ponzi scheme, quantitative easing, Renaissance Technologies, Richard Feynman, risk tolerance, risk-adjusted returns, Robert Gordon, Robert Shiller, Ronald Reagan, side hustle, Stephen Hawking, Steven Levy, stocks for the long run, tech worker, the scientific method, traffic fines, Vanguard fund, WeWork, working-age population

Having a gap between what you can technically endure versus what’s emotionally possible is an overlooked version of room for error. Another is saving for retirement. We can look at history and see, for example, that the U.S. stock market has returned an annual average of 6.8% after inflation since the 1870s. It’s a reasonable first approximation to use that as an estimate of what to expect on your own diversified portfolio when saving for retirement. You can use those return assumptions to back into the amount of money you’ll need to save each month to achieve your target nestegg. But what if future returns are lower? Or what if long-term history is a good estimate of the long-term future, but your target retirement date ends up falling in the middle of a brutal bear market, like 2009?


American Secession: The Looming Threat of a National Breakup by F. H. Buckley

Affordable Care Act / Obamacare, Andrei Shleifer, belling the cat, Bernie Sanders, British Empire, Cass Sunstein, colonial rule, crony capitalism, desegregation, diversified portfolio, Donald Trump, Francis Fukuyama: the end of history, guns versus butter model, hindsight bias, illegal immigration, immigration reform, income inequality, low interest rates, Michael Milken, military-industrial complex, old-boy network, Paris climate accords, race to the bottom, Republic of Letters, reserve currency, Ronald Coase, Stephen Fry, Suez crisis 1956, transaction costs, Washington Consensus, wealth creators

That sounds very much like Donald Trump complaining about Canadians. Would a seceding state even want free trade with the rest of America? Diversification We’re all familiar with the admonition not to put all of our eggs in one basket. We’ll not want to tie up all of our retirement funds in the shares of a single company, not when a well-diversified portfolio of investments in a group of companies promises a like return without the same downside risk. All you need do is hold shares in twenty-odd major industries. Or just invest in a mutual fund. What’s true of individuals is true of nations as well. You wouldn’t want your country to depend too closely on the fortunes of a single firm when you depend on the country’s solvency to provide you with policing, health care and social security.


pages: 194 words: 56,074

Angrynomics by Eric Lonergan, Mark Blyth

AlphaGo, Amazon Mechanical Turk, anti-communist, Asian financial crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big Tech, bitcoin, blockchain, Branko Milanovic, Brexit referendum, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collective bargaining, COVID-19, credit crunch, cryptocurrency, decarbonisation, deindustrialization, diversified portfolio, Donald Trump, Erik Brynjolfsson, Extinction Rebellion, fake news, full employment, gig economy, green new deal, Greta Thunberg, hiring and firing, Hyman Minsky, income inequality, income per capita, Jeremy Corbyn, job automation, labour market flexibility, liberal capitalism, lockdown, low interest rates, market clearing, Martin Wolf, Modern Monetary Theory, precariat, price stability, quantitative easing, Ronald Reagan, secular stagnation, self-driving car, Skype, smart grid, sovereign wealth fund, spectrum auction, The Future of Employment, The Great Moderation, The Spirit Level, universal basic income

In the rental property example, you could be unlucky – the property gets flooded, or destroyed in an earthquake. You don’t get any rental income, the value falls, and you still have a debt to repay at the end of the term. What then are the risks to a government that issues bonds at zero real interest rates and buys a diversified portfolio of global assets, yielding 4–6 per cent? The global stock market is a claim on the capital stock of the world – Europe, China, Japan, the rest of Asia and North America. For this to go badly wrong you would need to see serious damage to the capital base of the entire world. All the evidence suggests that it is growing, not shrinking, and if you invest for periods of 10–20 years, you can look through periodic crashes, when people panic, and pick-up bargains along the way to add to the portfolio, which is broadly what most of the sovereign wealth funds have done.


The Volatility Smile by Emanuel Derman,Michael B.Miller

Albert Einstein, Asian financial crisis, Benoit Mandelbrot, Black Monday: stock market crash in 1987, book value, Brownian motion, capital asset pricing model, collateralized debt obligation, continuous integration, Credit Default Swap, credit default swaps / collateralized debt obligations, discrete time, diversified portfolio, dividend-yielding stocks, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, implied volatility, incomplete markets, law of one price, London Whale, mandelbrot fractal, market bubble, market friction, Myron Scholes, prediction markets, quantitative trading / quantitative finance, risk tolerance, riskless arbitrage, Sharpe ratio, statistical arbitrage, stochastic process, stochastic volatility, transaction costs, volatility arbitrage, volatility smile, Wiener process, yield curve, zero-coupon bond

We can first hedge away the market-related risk of each stock by shorting some amount of the security M with which it is correlated. We call each mini-portfolio, which is long a single stock and short enough of M to remove the portfolio’s market risk, the market-neutral stock. We then diversify over a large number of market-neutral stocks. The risk of that first-hedged-and-then-diversified portfolio tends to zero as the number of market-neutral stocks grows, and therefore its expected return must also tend to zero. As a result, in an infinite portfolio of market-neutral stocks, every market-neutral stock must have zero Sharpe ratio and zero expected return. This, as we will show, leads to a result similar to that of the capital asset pricing model (CAPM).8 Let’s examine this line of reasoning more carefully.

All their risk is idiosyncratic. We now assume that these idiosyncratic risks are uncorrelated with each other (if they were all correlated, we could hedge away that correlation with another factor different from M, and extend World #3 into World #4 . . .). In that case, we can create a large diversified portfolio of n market-neutral stocks S̃ i such that the volatility of the portfolio tends to zero as n → ∞. Since this portfolio will replicate a riskless bond, we can show that, as in the previous World #2, the expected return of each market-neutral stock S̃ i must be the riskless rate r, and its Sharpe ratio must be zero.


pages: 807 words: 154,435

Radical Uncertainty: Decision-Making for an Unknowable Future by Mervyn King, John Kay

Airbus A320, Alan Greenspan, Albert Einstein, Albert Michelson, algorithmic trading, anti-fragile, Antoine Gombaud: Chevalier de Méré, Arthur Eddington, autonomous vehicles, availability heuristic, banking crisis, Barry Marshall: ulcers, battle of ideas, Bear Stearns, behavioural economics, Benoit Mandelbrot, bitcoin, Black Swan, Boeing 737 MAX, Bonfire of the Vanities, Brexit referendum, Brownian motion, business cycle, business process, capital asset pricing model, central bank independence, collapse of Lehman Brothers, correlation does not imply causation, credit crunch, cryptocurrency, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, DeepMind, demographic transition, discounted cash flows, disruptive innovation, diversification, diversified portfolio, Donald Trump, Dutch auction, easy for humans, difficult for computers, eat what you kill, Eddington experiment, Edmond Halley, Edward Lloyd's coffeehouse, Edward Thorp, Elon Musk, Ethereum, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, fear of failure, feminist movement, financial deregulation, George Akerlof, germ theory of disease, Goodhart's law, Hans Rosling, Helicobacter pylori, high-speed rail, Ignaz Semmelweis: hand washing, income per capita, incomplete markets, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Jeff Bezos, Jim Simons, Johannes Kepler, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Snow's cholera map, John von Neumann, Kenneth Arrow, Kōnosuke Matsushita, Linda problem, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, market bubble, market fundamentalism, military-industrial complex, Money creation, Moneyball by Michael Lewis explains big data, Monty Hall problem, Nash equilibrium, Nate Silver, new economy, Nick Leeson, Northern Rock, nudge theory, oil shock, PalmPilot, Paul Samuelson, peak oil, Peter Thiel, Philip Mirowski, Phillips curve, Pierre-Simon Laplace, popular electronics, power law, price mechanism, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, railway mania, RAND corporation, reality distortion field, rent-seeking, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Solow, Ronald Coase, sealed-bid auction, shareholder value, Silicon Valley, Simon Kuznets, Socratic dialogue, South Sea Bubble, spectrum auction, Steve Ballmer, Steve Jobs, Steve Wozniak, Suez crisis 1956, Tacoma Narrows Bridge, Thales and the olive presses, Thales of Miletus, The Chicago School, the map is not the territory, The Market for Lemons, The Nature of the Firm, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Davenport, Thomas Malthus, Toyota Production System, transaction costs, ultimatum game, urban planning, value at risk, world market for maybe five computers, World Values Survey, Yom Kippur War, zero-sum game

Antonio, the Merchant of Venice, anticipated Paul Samuelson’s discussion of the difference between single and multiple bets (recall that Samuelson was puzzled that a colleague might decline a wager with positive expected value if offered only once but accept if the proposal were repeated many times). Antonio explained the benefits of a diversified portfolio to Salarino, who worried about exposure to individual risks: My ventures are not in one bottom trusted, Nor to one place; nor is my whole estate Upon the fortune of this present year: Therefore my merchandise makes me not sad. 4 And Antonio was confident of capital adequacy. Having stood as guarantor for Shylock’s bond, he states: Why, fear not, man; I will not forfeit it: Within these two months, that’s a month before This bond expires, I do expect return Of thrice three times the value of this bond. 5 But Antonio’s plans are thrown off course.

Once you recognise that day-to-day price movements are not an indication of risk but a measure of meaningless noise in markets, you can achieve your longer-term objectives at lower cost by learning to ignore such fluctuations. There can be reward – not without risk, but with little risk – through building a diversified portfolio, turning off your computer, and thinking hard, though not necessarily frequently, about ‘what is going on here’. Broad diversification, involving building a portfolio which will be robust and resilient to unpredictable events, is the best protection against radical uncertainty, because most radically uncertain events will have a significant long-run effect on only some of the assets which you own.


pages: 207 words: 52,716

Capitalism 3.0: A Guide to Reclaiming the Commons by Peter Barnes

Albert Einstein, car-free, carbon tax, clean water, collective bargaining, corporate governance, corporate personhood, corporate raider, corporate social responsibility, cotton gin, dark matter, digital divide, diversified portfolio, do well by doing good, Easter island, en.wikipedia.org, Garrett Hardin, gentrification, hypertext link, Isaac Newton, James Watt: steam engine, jitney, junk bonds, Michael Milken, military-industrial complex, money market fund, new economy, patent troll, precautionary principle, profit maximization, Ronald Coase, telemarketer, The Wealth of Nations by Adam Smith, Tragedy of the Commons, transaction costs, War on Poverty, Yogi Berra

This would be our price not just for using a regulated stock exchange, but also for all the other privileges (limited liability, perpetual life, copyrights and patents, and so on) that we currently bestow on private corporations for free. 108 | A SOLUTION In due time, the American Permanent Fund would have a diversified portfolio worth several trillion dollars. Like its Alaskan counterpart, it would pay equal yearly dividends to everyone. As the stock market rose and fell, so would everyone’s dividend checks. A rising tide would lift all boats. America would truly be an “ownership society.” A Children’s Opportunity Trust Not long ago, while researching historic documents for this book, I stumbled across this sentence in the Northwest Ordinance of 1787: “[T]he estates, both of resident and nonresident proprietors in the said territory, dying intestate, shall descent to, and be distributed among their children, and the descendants of a deceased child, in equal parts.”


pages: 330 words: 59,335

The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William Thorndike

Albert Einstein, AOL-Time Warner, Atul Gawande, Berlin Wall, book value, Checklist Manifesto, choice architecture, Claude Shannon: information theory, collapse of Lehman Brothers, compound rate of return, corporate governance, discounted cash flows, diversified portfolio, Donald Trump, Fall of the Berlin Wall, Gordon Gekko, Henry Singleton, impact investing, intangible asset, Isaac Newton, junk bonds, Louis Pasteur, low interest rates, Mark Zuckerberg, NetJets, Norman Mailer, oil shock, pattern recognition, Ralph Waldo Emerson, Richard Feynman, shared worldview, shareholder value, six sigma, Steve Jobs, stock buybacks, Teledyne, Thomas Kuhn: the structure of scientific revolutions, value engineering, vertical integration

During this heady period, there was significantly less competition for acquisitions than today (private equity firms did not yet exist), and the price to buy control of an operating company (measured by its P/E ratio) was often materially less than the multiple the acquirer traded for in the stock market, providing a compelling logic for acquisitions. Singleton took full advantage of this extended arbitrage opportunity to develop a diversified portfolio of businesses, and between 1961 and 1969, he purchased 130 companies in industries ranging from aviation electronics to specialty metals and insurance. All but two of these companies were acquired using Teledyne’s pricey stock. Singleton’s approach to acquisitions, however, differed from that of other conglomerateurs.


pages: 225 words: 61,388

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

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

Although oil price shocks may induce a global economic recession (recent oil price heights have so far defied this assumption), the counter-cyclicality of emerging-market debt – the fact that oil-producing countries may fare well when oil prices rise – means emerging-market assets can help protect a more diversified portfolio. There is an additional factor that can drive demand for the bonds of well-run African countries. Very often, international investors have restrictions on what they can and cannot buy for their portfolios. For example, some pension funds are only allowed to buy securities (stocks or bonds) which are included in approved lists (indices) drawn up by rating agencies or investment banks (for example, the J.


pages: 221 words: 61,146

The Crowded Universe: The Search for Living Planets by Alan Boss

Albert Einstein, Dava Sobel, diversified portfolio, full employment, Gregor Mendel, if you build it, they will come, James Webb Space Telescope, Johannes Kepler, Kuiper Belt, low earth orbit, Mars Rover, Neil Armstrong, Pluto: dwarf planet, Silicon Valley, space junk, wikimedia commons, zero-sum game

Jon Morse, Stern’s new director of SMD’s Astrophysics Division, pointed out that the Navigator Program could at best hope to compete for a new mission in the next decade that would cost no more than $600 million, a sum considerably less than what was needed to finish SIM, much less get started on TPF-C and TPF-I. Morse called for a “diversified portfolio” for Navigator, a plan that would begin with relatively modest precursor missions rather than with flagship-class missions such as SIM and the TPFs. The Webb Telescope was scheduled to launch in 2013, and the next flagship mission would be a new X-ray observatory that would fly in 2020, according to Morse.


pages: 287 words: 62,824

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

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

And with the calculation above, if the investment options in your employer’s 401(k) plan are just 0.73% more expensive than what you would pay in a taxable brokerage account, then the annual benefit of your 401(k) would be completely eliminated. This isn’t a high bar to hit. For example, if we assume that you would have to pay 0.1% per year in fund fees to get a diversified portfolio in a brokerage account, then paying anything more than 0.83% [0.73% + 0.1%] per year in your 401(k) would eliminate its long-term tax benefit entirely. TD Ameritrade found that the average all-in cost for the typical 401(k) plan in the U.S. was 0.45% in 2019.⁹⁷ This means that the average American gets a 0.38% annual benefit [0.83% – 0.45%] from their 401(k) plan (beyond the employer match).


pages: 598 words: 169,194

Bernie Madoff, the Wizard of Lies: Inside the Infamous $65 Billion Swindle by Diana B. Henriques

accounting loophole / creative accounting, airport security, Albert Einstein, AOL-Time Warner, banking crisis, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, break the buck, British Empire, buy and hold, centralized clearinghouse, collapse of Lehman Brothers, computerized trading, corporate raider, diversified portfolio, Donald Trump, dumpster diving, Edward Thorp, financial deregulation, financial engineering, financial thriller, fixed income, forensic accounting, Gordon Gekko, index fund, locking in a profit, low interest rates, mail merge, merger arbitrage, messenger bag, money market fund, payment for order flow, plutocrats, Ponzi scheme, Potemkin village, proprietary trading, random walk, Renaissance Technologies, riskless arbitrage, Ronald Reagan, Savings and loan crisis, short selling, short squeeze, Small Order Execution System, source of truth, sovereign wealth fund, too big to fail, transaction costs, traveling salesman

By the time Cohmad was formed, Bernie Madoff’s reported strategy for producing those profits was changing—a shift that had begun in 1980, when his biggest clients pressed him (in his recounting) to “offer them another form of trading that would produce long-term capital gains rather than the short-term capital gains of arbitrage.” The tax shelters of the 1970s were cracking, US income tax rates seemed high, and his wealthiest clients wanted to reduce their tax bills. He claimed that he offered them a new strategy: “a diversified portfolio of equities hedged as necessary” with various kinds of short sales. In a letter from prison, Madoff insisted that he cautioned his clients that the stocks in their portfolios would have to be held long enough to qualify for the capital gains tax break and, “more importantly, that the stock market would have to go up during the holding period, which was certainly difficult to predict.”

At its peak, when Anchor Holdings supposedly had more than $12 million in assets, its largest individual account was under $750,000, and its smallest was a Roth individual retirement account worth just $3,224.43. Anchor Holdings invested these modest nest eggs in another hedge fund, which invested all its assets in an apparently diversified portfolio of international hedge funds. That portfolio consisted of the Primeo fund, the Santa Clara fund, and four other hedge funds—every single one of which was invested exclusively with Madoff. Believing they had avoided the risk of putting all their eggs in one basket, these small investors had actually handed their savings over to one man: Bernie Madoff.


pages: 229 words: 64,697

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

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

However, if you don't also teach them how to handle money, you'll end up with your very own Paris Hilton … or Donald Trump — his father was a multimillionaire, you know (don't even get me started on this ). Think about it. What would you have done if your old man handed you a cheque for, say, $140 000 on your 21st birthday? You'd have developed a sensible, diversified portfolio … of weed, whisky and women. Woo-hooo! (I didn't get a cheque, or even a dollar coin. In fact, the closest thing to a precious metal I got was an engraved 21st birthday beer stein that was topped up throughout the night, leaving me a heaving mess the next morning.) No, the aim is to build up their net worth and their self-worth.


pages: 222 words: 70,559

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

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

All in all, if they are likely to be somewhat less exciting than some of our other recommendations, they offer a solid blend of growth, inflation protection, safety, and income. One of our favorite REITs is Apartment Investment and Management, which concentrates on buying and managing multifamily apartment complexes. It is geographically diverse, with interests in nearly every state. Another top pick is Duke Realty, which has a diversified portfolio of properties rented to a wide range of businesses, including those in manufacturing, retailing, wholesale trade, and professional services. It also owns or controls substantial acreage ready for development. In addition, it provides, on a fee basis, a variety of services to tenants at properties owned by others.


pages: 228 words: 68,315

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

buy and hold, diversification, diversified portfolio, driverless car, Firefox, low interest rates, Mr. Money Mustache, risk tolerance, TaskRabbit, transaction costs, young professional

No, it’s not particularly tax-efficient because of capital gains tax, but there’s more to life than paying as little tax as possible. In terms of diversification, this isn’t a terrible idea. If you could make roughly the same net return from a couple of unencumbered properties or a globally diversified portfolio of stocks and bonds, the latter might give you better peace of mind. Restructure The options above are all totally valid strategies, but the best option of all is likely to be a mix-and-match of all of them, depending on your risk tolerance and income requirements. For example, you could: Sell a couple of properties to raise cash to put into stocks and bonds for diversification.


pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

Alan Greenspan, Andrei Shleifer, banking crisis, Bear Stearns, Bernie Madoff, business cycle, collateralized debt obligation, collective bargaining, compensation consultant, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Glass-Steagall Act, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, low interest rates, market bubble, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, oil shock, Ponzi scheme, price stability, profit maximization, proprietary trading, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, savings glut, shareholder value, short selling, statistical model, subprime mortgage crisis, too big to fail, transaction costs, very high income

Given discounting to present value and the fact that by virtue of the principle of limited liability the creditors of a bankrupt corporation cannot go after the personal assets of the corporation's owners or managers, events that are catastrophic to a corporation if they occur but are highly unlikely to occur, and therefore if they do occur are likely to occur in the distant future, will not influence the corporation's behavior. A bankruptcy is not the end of the world for a company's executives, or even for its shareholders if they have a diversified portfolio of stocks and other assets. But a cascade of bank bankruptcies can be a disaster for a nation. The more leveraged a bank's (or other financial company's) capital structure is, the greater the risk of insolvency. Whether bank insolvencies, even if they precipitate a stock market crash, will trigger a depression thus depends on how widespread the insolvencies are, how deep the decline in the stock market is, and—of critical, but until the depression was upon us of neglected, importance—how much savings people have.


pages: 247 words: 68,918

The End of the Free Market: Who Wins the War Between States and Corporations? by Ian Bremmer

"World Economic Forum" Davos, affirmative action, Asian financial crisis, banking crisis, Berlin Wall, BRICs, British Empire, centre right, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, cuban missile crisis, Deng Xiaoping, diversified portfolio, Doha Development Round, Exxon Valdez, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, Glass-Steagall Act, global reserve currency, global supply chain, household responsibility system, invisible hand, joint-stock company, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, low skilled workers, mass immigration, means of production, megacity, Mikhail Gorbachev, military-industrial complex, mutually assured destruction, Naomi Klein, Nelson Mandela, new economy, offshore financial centre, open economy, race to the bottom, reserve currency, risk tolerance, Savings and loan crisis, shareholder value, Shenzhen special economic zone , South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, trade route, tulip mania, uranium enrichment, Washington Consensus, Yom Kippur War, zero-sum game

Having amassed more than $2 trillion in foreign-exchange reserves from the success of its export strategy, China created its first sovereign wealth fund, the China Investment Corporation (CIC), in 2007 with $200 billion in assets under management. A government agency known as the State Administration of Foreign Exchange (SAFE) had been behaving like a sovereign wealth fund for years, but many within the leadership believed it needed to create a more broadly diversified portfolio to bring a better return than the more conservative SAFE could provide. Both institutions sometimes appear to make commercial decisions with political goals in mind—as when SAFE bought $300 million in government bonds from Costa Rica in September 2008 to persuade that country’s government to end its diplomatic recognition of Taiwan in favor of China.


pages: 213 words: 70,742

Notes From an Apocalypse: A Personal Journey to the End of the World and Back by Mark O'Connell

Berlin Wall, bitcoin, Black Lives Matter, blockchain, California gold rush, carbon footprint, Carrington event, clean water, Colonization of Mars, conceptual framework, cryptocurrency, disruptive innovation, diversified portfolio, Donald Trump, Donner party, Easter island, Elon Musk, Greta Thunberg, high net worth, Jeff Bezos, life extension, lock screen, low earth orbit, Marc Andreessen, Mars Society, Mikhail Gorbachev, mutually assured destruction, New Urbanism, off grid, Peter Thiel, post-work, Sam Altman, Silicon Valley, Stephen Hawking, Steven Pinker, surveillance capitalism, tech billionaire, the built environment, yield curve

(As though enthusiastically pursuing the clunkiest possible metaphor for capitalism at its most vampiric, he had publicly expressed interest in a therapy involving regular transfusions of blood from young people as a potential means of reversing the aging process.) He was in one sense a figure of almost cartoonishly outsized villainy. But in another, deeper sense, he was pure symbol: less an actual person than a shell company for a diversified portfolio of anxieties about the future, a human emblem of the moral vortex at the center of the market. It was in this second sense that I was fascinated and horrified by Thiel, who seemed to me increasingly to represent the world my son would likely be forced to live in. It was in the early summer of 2017, just as my interests in the topics of New Zealand and Thiel and civilizational collapse were beginning to converge into a single obsession, that I first heard from Anthony.


pages: 231 words: 64,734

Safe Haven: Investing for Financial Storms by Mark Spitznagel

Albert Einstein, Antoine Gombaud: Chevalier de Méré, asset allocation, behavioural economics, bitcoin, Black Swan, blockchain, book value, Brownian motion, Buckminster Fuller, cognitive dissonance, commodity trading advisor, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, delayed gratification, diversification, diversified portfolio, Edward Thorp, fiat currency, financial engineering, Fractional reserve banking, global macro, Henri Poincaré, hindsight bias, Long Term Capital Management, Mark Spitznagel, Paul Samuelson, phenotype, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, random walk, rent-seeking, Richard Feynman, risk free rate, risk-adjusted returns, Schrödinger's Cat, Sharpe ratio, spice trade, Steve Jobs, tail risk, the scientific method, transaction costs, value at risk, yield curve, zero-sum game

Thus, our null hypothesis that the three‐month Treasury bill is a cost‐effective safe haven must be rejected, as we deny its consequent: that adding the three‐month Treasury bill to our SPX portfolio raises that portfolio's CAGR over time (and which we've just seen, it doesn't). As a next step, we can move further out along the yield curve, from 3 months to 10 and 20 years. This becomes more representative of the bonds in the “stocks/bonds” portfolio that is the “balanced portfolio” in investing. We might even think of it as the standard in diversified portfolios. As we move out along the yield curve, we also move out along the safe haven spectrum as defined by our three cartoons. And as we move from the three‐month to the 10‐ and 20‐year Treasury maturity, we move from the store‐of‐value toward a more presumably negatively correlated payoff—a hybrid between the two.


pages: 1,202 words: 424,886

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

accounting loophole / creative accounting, Alan Greenspan, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, Black-Scholes formula, book value, Brownian motion, business climate, buy and hold, capital controls, central bank independence, centralized clearinghouse, corporate governance, credit crunch, Credit Default Swap, cross-border payments, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, disintermediation, distributed generation, diversification, diversified portfolio, Dutch auction, financial innovation, financial intermediation, fixed income, flag carrier, foreign exchange controls, full employment, Glass-Steagall Act, Goodhart's law, Greenspan put, guns versus butter model, high net worth, implied volatility, income per capita, intangible asset, interest rate derivative, interest rate swap, inverted yield curve, junk bonds, land bank, large denomination, locking in a profit, London Interbank Offered Rate, low interest rates, margin call, market bubble, market clearing, market fundamentalism, Money creation, money market fund, mortgage debt, Myron Scholes, offshore financial centre, paper trading, pension reform, Phillips curve, Ponzi scheme, price mechanism, price stability, profit motive, proprietary trading, prudent man rule, Real Time Gross Settlement, reserve currency, risk free rate, risk tolerance, risk/return, Savings and loan crisis, seigniorage, shareholder value, short selling, short squeeze, tail risk, 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

Many such instruments, for example, time deposits, have low to zero minimum denominations, are highly liquid, and expose the investor to negligible risk. Financial intermediaries are able to offer such attractive securities for several reasons. First, they pool the funds of many investors in a highly diversified portfolio, thereby reducing risk and overcoming the minimum denominations problem. Second, to the extent that one saver’s withdrawal is likely to be met by another’s deposit, intermediaries, such as banks and S&Ls, can with reasonable safety borrow short term from depositors and lend long term to borrowers.

Thus, in determining the relative value of a loan participation offered to him, the investor needs to consider that he gets a higher rate on a loan participation than on commercial paper, but on commercial paper he has only one credit risk. Three Motivations for Buying and Selling Loan Participations There are three motivations for the buying and selling of loan participations: to exploit a comparative advantage, either by originating loans that can be sold or by funding loans that are for sale; to diversify portfolio assets, particularly for banks that find diversification opportunities relatively limited; and to overcome reputational barriers, especially for those banks whose reputation might limit their access to the secondary loan market.1 Banks with a comparative advantage in buying loans and those with an advantage in selling loans take advantage of their particular strengths in these areas.

Let rte = the tax-exempt rate paid as a decimal rt = the equivalent taxable rate as a decimal T = the taxpayer’s federal marginal rate as a decimal Then, for the ratio of the yield on a taxable security to the equivalent to the yield on a tax-exempt security, the following relationship must hold: (1 – T)rt = rte CHAPTER 26 Money Market Funds Copyright © 2007, 1990, 1983, 1978 by The McGraw-Hill Companies, Inc. Click here for terms of use. A mutual fund is a device through which investors pool funds to invest in a diversified portfolio of securities. The investor who puts money into a mutual fund gets shares in return and becomes in effect a part owner of the fund. Professional management is provided by an outside investment company, which charges the fund a fee equal to a small percentage of the fund’s assets. Mutual funds were originally developed to give people an opportunity to invest in a diversified and professionally managed portfolio of stocks or bonds—some funds invest in both.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", "there is no alternative" (TINA), "World Economic Forum" Davos, affirmative action, Alan Greenspan, Albert Einstein, algorithmic trading, Andy Kessler, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, BRICs, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, carbon credits, Carl Icahn, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, deal flow, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Dr. Strangelove, Dutch auction, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial engineering, financial independence, financial innovation, financial thriller, fixed income, foreign exchange controls, full employment, Glass-Steagall Act, global reserve currency, Goldman Sachs: Vampire Squid, Goodhart's law, Gordon Gekko, greed is good, Greenspan put, happiness index / gross national happiness, haute cuisine, Herman Kahn, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", job automation, Johann Wolfgang von Goethe, John Bogle, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Michael Milken, Mikhail Gorbachev, Milgram experiment, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Phillips curve, planned obsolescence, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, Reminiscences of a Stock Operator, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk free rate, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, stock buybacks, survivorship bias, tail risk, Teledyne, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, two and twenty, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Building on Markowitz’s work, in the 1960s, Jack Treynor, William Sharpe, John Lintner, and Jan Mossin developed the capital asset pricing model (CAPM). The CAPM calculated a theoretically appropriate required rate of return for assets, such as an individual security or a portfolio. Where an asset is added to a well-diversified portfolio, the additional return required is related to the risk unique to that security, which cannot be diversified away. The CAPM is one of modern finance’s iconic equations: E[Ri] = Rf + Beta [E[Rm] – Rf] where: E[Ri] is the expected return on the asset. Rf is the risk-free rate of interest on government bonds.

If three loans defaulted in the portfolio, then the investor would lose only $0.36 million (loss of $120,000 per company (60 percent of $200,000) times 3). In contrast, where they invested in the CDO equity, for the same three losses the investor loses $20 million. For the same event (three defaults), the investor’s loss is 56 times greater where they purchase the equity rather than investing in a diversified portfolio ($20 million versus $0.36 million). This is known as embedded loss leverage. Linked in a dizzy spiral of debt as their modus operandi merged, banks and the inhabitants of the shadow banking sector (ABS issuers, CDO issuers, conduits, SIVs, hedge funds, reinsurers and monoline insurers) increasingly resembled each other.


pages: 661 words: 185,701

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

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

A firm’s business plan might not work, competition might drive down its profits, or poor management decisions could drive the company to ruin. In these cases, the value of an investor’s equities might fall or could conceivably even evaporate altogether. Investing in stocks is thus riskier than putting one’s money in a bank savings account. With a diversified portfolio of stocks, as discussed earlier, one could generate better returns than with a bank deposit but at a lower level of risk than is the case when owning stock in just one or a handful of companies. But there is no getting around the greater riskiness of stocks when compared with deposits. For those who would like to take on a little more risk than is involved in depositing money in a bank in return for a slightly better return, finance of course has an answer.

The strategy of investing in low-cost funds and simply holding them turns out to work better over the long term than the returns generated by a majority of investment managers. This investment philosophy is perfectly suited to an automated investment process. Wealthfront takes into account a few parameters such as an investor’s stated tolerance for risk and then uses algorithms to construct a diversified portfolio of low-cost index funds that maximize return for that level of risk. This automated procedure and the low fees are quite different from the incentives of a stockbroker, who either earns commissions for steering clients toward particular funds or makes money based on the extent of a client’s trading.


pages: 293 words: 78,439

Dual Transformation: How to Reposition Today's Business While Creating the Future by Scott D. Anthony, Mark W. Johnson

activist fund / activist shareholder / activist investor, additive manufacturing, Affordable Care Act / Obamacare, Airbnb, Amazon Web Services, Andy Rubin, Apollo 13, asset light, autonomous vehicles, barriers to entry, behavioural economics, Ben Horowitz, Big Tech, blockchain, business process, business process outsourcing, call centre, Carl Icahn, Clayton Christensen, cloud computing, commoditize, corporate governance, creative destruction, crowdsourcing, death of newspapers, disintermediation, disruptive innovation, distributed ledger, diversified portfolio, driverless car, Internet of things, invention of hypertext, inventory management, Jeff Bezos, job automation, job satisfaction, Joseph Schumpeter, Kickstarter, late fees, Lean Startup, long term incentive plan, Lyft, M-Pesa, Marc Andreessen, Marc Benioff, Mark Zuckerberg, Minecraft, obamacare, Parag Khanna, Paul Graham, peer-to-peer lending, pez dispenser, recommendation engine, Salesforce, self-driving car, shareholder value, side project, Silicon Valley, SimCity, Skype, software as a service, software is eating the world, Steve Jobs, subscription business, the long tail, the market place, the scientific method, Thomas Kuhn: the structure of scientific revolutions, transfer pricing, uber lyft, Watson beat the top human players on Jeopardy!, Y Combinator, Zipcar

In what turned out to be a prescient interview with CBC in April 2008, RIM’s co-CEO, Jim Balsillie, said, “I don’t look up too much or down too much. The great fun is doing what you do every day. I’m sort of a poster child for not sort of doing anything but what we do every day . . . We’re a very poorly diversified portfolio. It either goes to the moon or crashes to the Earth.” And crash both Nokia and RIM did. In January 2007 Steve Jobs announced, and in June Apple launched, the iPhone. Dubbed the “Jesus phone” by worshippers, the phone created a media firestorm and immediately started showing up in the hands of celebrities.


pages: 290 words: 72,046

5 Day Weekend: Freedom to Make Your Life and Work Rich With Purpose by Nik Halik, Garrett B. Gunderson

Airbnb, bitcoin, Buckminster Fuller, business process, clean water, collaborative consumption, cryptocurrency, delayed gratification, diversified portfolio, do what you love, drop ship, en.wikipedia.org, estate planning, Ethereum, fear of failure, fiat currency, financial independence, gamification, glass ceiling, Grace Hopper, Home mortgage interest deduction, independent contractor, initial coin offering, Isaac Newton, Kaizen: continuous improvement, litecoin, low interest rates, Lyft, market fundamentalism, microcredit, minimum viable product, mortgage debt, mortgage tax deduction, multilevel marketing, Nelson Mandela, passive income, peer-to-peer, peer-to-peer rental, planned obsolescence, Ponzi scheme, quantitative easing, Ralph Waldo Emerson, ride hailing / ride sharing, selling pickaxes during a gold rush, sharing economy, side project, Skype, solopreneur, subscription business, TaskRabbit, TED Talk, traveling salesman, uber lyft

The Bank Strategy is a term I coined, and it involves creating insurance policies to generate premiums using options credit spreads on the financial market. A credit spread involves simultaneously selling and purchasing an options contract in the same expiration month, but at different strike prices. I create these credit spreads using the diversified portfolio of the S&P 500 index, which is a basket of the leading 500 stocks in the world. Creating credit spreads on the entire S&P 500 gives me more control and less market volatility. Here’s how it works. I create an insurance policy on the performance of the S&P 500. Speculators, traders, and hedge fund managers buy these insurance policies to hedge their bets.


pages: 249 words: 77,342

The Behavioral Investor by Daniel Crosby

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

Of stories and stocks The flipside to the “If I’d just bought Apple when it IPO’d” narrative is that buying individual stocks is, in isolation, a truly risky endeavor. According to JP Morgan, 40% of stocks have suffered “catastrophic losses” since 1980, meaning that they fell by 70% or more! But what happens when we pool those risky individual names into a diversified portfolio? Jeremy Siegel found in Stocks for the Long Run that in every rolling 30-year period from the late 1800s to 1992, stocks outperformed both bonds and cash. In rolling ten-year periods, stocks beat cash over 80% of the time and there was never a rolling 20-year period in which stocks lost money.


pages: 251 words: 76,128

Borrow: The American Way of Debt by Louis Hyman

Alan Greenspan, asset-backed security, barriers to entry, big-box store, business cycle, cashless society, collateralized debt obligation, credit crunch, deindustrialization, deskilling, diversified portfolio, financial engineering, financial innovation, Ford Model T, Ford paid five dollars a day, Home mortgage interest deduction, housing crisis, income inequality, low interest rates, market bubble, McMansion, mortgage debt, mortgage tax deduction, Network effects, new economy, Paul Samuelson, plutocrats, price stability, Ronald Reagan, Savings and loan crisis, statistical model, Tax Reform Act of 1986, technology bubble, transaction costs, vertical integration, women in the workforce

Many businesses fail, as many mortgages are foreclosed, but through risk management and federal standards, the bonds could handle that possibility. With good information, rating those companies would be more accurate and transparent. Unlike private credit-rating agencies, the bureau’s future would not depend on giving businesses a good review. With a diversified portfolio of business investments, risks for investors would go down. Business investment wouldn’t be the province of a few millionaires and their private equity; it could be done by average Joes with their pension funds. How much better would the world be if workers’ pension funds were invested in activities that produced jobs instead of McMansions?


pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

Alan Greenspan, asset-backed security, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Black-Scholes formula, Blythe Masters, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, fixed income, George Akerlof, Glass-Steagall Act, greed is good, Greenspan put, hedonic treadmill, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, junk bonds, Kickstarter, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, low interest rates, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, off-the-grid, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Ronald Reagan, Savings and loan crisis, shareholder value, South Sea Bubble, statistical model, Tax Reform Act of 1986, The Great Moderation, the payments system, too big to fail, tulip mania, Tyler Cowen, value at risk

The reverse occurs if the portfolio is invested only in the sunscreen company, the alternative investment: the portfolio will be high performance when the sun is out but will tank when clouds roll in. To minimize the weather-dependent risk in the example portfolio, the investment should be split between the companies. With this diversified portfolio, returns are decent no matter the weather, rather than alternating between excellent and terrible.” What the pros do is a sophisticated version of that.5 I’ve mentioned Myron Scholes and Fischer Black’s 1973 paper as the moment when the derivatives market underwent its modernist revolution.


pages: 280 words: 79,029

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

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

So the platforms have developed various tools for automatically parceling investors’ money out to different borrowers in different risk categories. Selling loans to investors as securitizations is another way of ensuring diversification. The upshot is that, in small but significant ways, the platforms are evolving to be more bank-like. The platforms are already doing their own credit analysis. They are already providing diversified portfolios for investors to fund. Some have provisioning funds that, in effect, mimic the role of equity by protecting lenders from defaults. RateSetter, one of the British platforms, is even carrying out a mild version of maturity transformation by allowing investors to loan money for shorter periods than the loans that are being funded.


pages: 292 words: 76,185

Pivot: The Only Move That Matters Is Your Next One by Jenny Blake

Airbnb, Albert Einstein, Cal Newport, cloud computing, content marketing, data is the new oil, diversified portfolio, do what you love, East Village, en.wikipedia.org, Erik Brynjolfsson, fear of failure, future of work, high net worth, Jeff Bezos, job-hopping, Kevin Kelly, Khan Academy, knowledge worker, Lao Tzu, Lean Startup, minimum viable product, Nate Silver, passive income, Ralph Waldo Emerson, risk tolerance, Second Machine Age, sharing economy, side hustle, side project, Silicon Valley, Silicon Valley startup, Skype, Snapchat, software as a service, solopreneur, Startup school, stem cell, TED Talk, too big to fail, Tyler Cowen, white picket fence, young professional, zero-sum game

It was this redundancy that smoothed his definitive transition from the armed forces when he fully retired from the military after twenty-seven years of service. Kyle noted that the second major shift felt much easier than the first. “This one doesn’t feel like a big deal because I already went through the really tough work ten years ago,” he said. On the redundancy of the last ten years, Kyle also pointed out how his diversified portfolio approach has also served him well within his current business activities. “It has been a damn good thing, because other businesses that I have started have fallen off-line,” he said. “The redundant tracks have kept me going. At various times in the last ten years, one of my businesses has been on life support.


pages: 706 words: 206,202

Den of Thieves by James B. Stewart

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Bear Stearns, Black Monday: stock market crash in 1987, book value, Carl Icahn, corporate raider, creative destruction, deal flow, discounted cash flows, diversified portfolio, fixed income, fudge factor, George Gilder, index arbitrage, Internet Archive, Irwin Jacobs, junk bonds, margin call, Michael Milken, money market fund, Oscar Wyatt, Ponzi scheme, rolodex, Ronald Reagan, Savings and loan crisis, shareholder value, South Sea Bubble, Tax Reform Act of 1986, The Predators' Ball, walking around money, zero-coupon bond

Some of Milken's prospects were also potential corporate clients for Drexel. Insurance companies with large pools of assets were especially eager to invest profitably. Joseph went along with Milken on countless visits to spread the gospel of high-yield. At each stop, Milken ran through his arguments: The bond market was too risk-averse; a well-diversified portfolio would provide a better return; liquidity was growing as more companies heeded Milken's message; and returns would comfortably exceed the risk premium. It was a simple, effective message. Increasingly, it worked. Among Milken's early big successes was a group of wealthy, mostly Jewish financiers who had acquired insurance companies.

He proceeded to sell the $30 million issue easily, with a whopping underwriting fee of 3%. Milken went on that year to do six more issues for companies that couldn't otherwise get capital. At about the same time, he sold the idea of the first high-yield mutual funds, allowing small investors to invest in a diversified portfolio of junk bonds. Milken's dream of liquidity was close to fruition. The mechanism for a revolution in finance was in place, right under the noses of the Wall Street establishment that had disdained low-grade debt. Winnick, meanwhile, had moved at Kantor's behest to the high-grade bond desk in Drexel's downtown offices.


pages: 840 words: 202,245

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

Abraham Maslow, accounting loophole / creative accounting, Alan Greenspan, AOL-Time Warner, Asian financial crisis, bank run, Bear Stearns, book value, Bretton Woods, business cycle, capital controls, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Glass-Steagall Act, Greenspan put, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, John Bogle, John Meriwether, junk bonds, Kitchen Debate, laissez-faire capitalism, locking in a profit, Long Term Capital Management, low interest rates, market bubble, Mary Meeker, Michael Milken, minimum wage unemployment, MITM: man-in-the-middle, Money creation, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, North Sea oil, Northern Rock, oil shock, Paul Samuelson, Philip Mirowski, Phillips curve, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Bork, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, scientific management, shareholder value, short selling, Silicon Valley, Simon Kuznets, tail risk, Tax Reform Act of 1986, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

Braddock Hickman, analyzed returns on corporate bonds issued between 1900 and 1943 and found that an investor who bought a highly diversified selection of these bonds and held them for the long run would earn a higher return than an investor who bought investment grade bonds only. In fact, Milken may have misinterpreted (or misrepresented) the study. The strategy depended on buying large numbers of differing bonds, building a well-diversified portfolio, not picking a handful of potential winners, which was Milken’s objective. But Milken, whether he understood the full implications of the study or not, was emboldened by the research. It is interesting that Wall Street accepted Milken’s interpretation that financial markets were inefficient when it was profitable to do so; when it gave CEOs outsize stock options based on the stock price of the company, Wall Street generally argued that markets were so efficient the stock price truly reflected the long-term value of the company.

Anthony Plath, “Financing Takeovers: Junk Bonds and Leveraged Buyouts,” Managerial Finance 17, no. 1 (February 1993). 3 “THE FIRST THING YOU NOTICED”: Author conversation with Martin Siegel, 1985. 4 IN FACT, MILKEN MAY HAVE MISINTERPRETED: Riskier assets should return a higher yield over time on average or they would not be bought at all; the higher yield justifies the risk. The problem is that an investor cannot know which companies will perform well and which will not, and will often lose a lot of money if invested in only a handful of companies, one or two of which may go bankrupt. A large, diversified portfolio likely reduces the penalties of choosing the wrong bonds, however, because the high yields offered by all the bonds more than compensate for the small handful of big losers. The same principle holds for a portfolio of stocks. The average return on stocks should be higher over time; but owning any individual stock is riskier. 5 HE THEN WENT EAST: Howard Rudnitsky, Allan Sloan, Richard L.


pages: 270 words: 79,180

The Middleman Economy: How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit by Marina Krakovsky

Affordable Care Act / Obamacare, Airbnb, Al Roth, Ben Horowitz, Benchmark Capital, Black Swan, buy low sell high, Chuck Templeton: OpenTable:, Credit Default Swap, cross-subsidies, crowdsourcing, deal flow, disintermediation, diversified portfolio, experimental economics, George Akerlof, Goldman Sachs: Vampire Squid, income inequality, index fund, information asymmetry, Jean Tirole, Joan Didion, John Zimmer (Lyft cofounder), Kenneth Arrow, Lean Startup, Lyft, Marc Andreessen, Mark Zuckerberg, market microstructure, Martin Wolf, McMansion, Menlo Park, Metcalfe’s law, moral hazard, multi-sided market, Network effects, patent troll, Paul Graham, Peter Thiel, pez dispenser, power law, real-name policy, ride hailing / ride sharing, Robert Metcalfe, Sand Hill Road, search costs, seminal paper, sharing economy, Silicon Valley, social graph, supply-chain management, TaskRabbit, the long tail, The Market for Lemons, the strength of weak ties, too big to fail, trade route, transaction costs, two-sided market, Uber for X, uber lyft, ultimatum game, Y Combinator

But that’s not all there is to managing risk for your trading partners, and the next chapter explores more broadly how middlemen can play the role of Risk Bearer without exposing themselves to unnecessary risks. 4 THE RISK BEARER Reducing Uncertainty THE ROLE: From banks and insurance companies to wholesalers, some companies earn a premium for bearing risk. By building diversified portfolios, they’re better able to weather volatility than their trading partners. The same principle holds true for nonobvious middlemen, from gallerists and venture capitalists to Internet platforms that deliver on-demand services: all are better able than their trading partners to bear risk. One key to being an admirable Risk Bearer: being able to discern internal from external risk, avoiding the former risk while embracing the latter.


pages: 348 words: 83,490

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

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

Edward Russo and Paul J. H. Schoemaker, Winning Decisions: Getting It Right the First Time (New York: Doubleday, 2002), 3-10. 2 Alfred Rappaport and Michael J. Mauboussin, Expectations Investing (Boston, Mass.: Harvard Business School Press, 2001), 106-8. In this discussion, we assume investors running diversified portfolios are risk-neutral. For techniques to capture risk aversion, see Ron S. Dembo and Andrew Freeman, Seeing Tomorrow: Rewriting the Rules of Risk (New York: John Wiley & Sons, 1998). 3 Michael Steinhardt, No Bull: My Life In and Out of Markets (New York: John Wiley & Sons, 2001), 129. 4 Steven Crist, “Crist on Value,” in Andrew Beyer et al., Bet with the Best: All New Strategies From America’s Leading Handicappers (New York: Daily Racing Form Press, 2001), 64.


pages: 304 words: 85,291

Cities: The First 6,000 Years by Monica L. Smith

Anthropocene, bread and circuses, classic study, clean water, diversified portfolio, failed state, financial innovation, gentrification, hiring and firing, invention of writing, Jane Jacobs, New Urbanism, payday loans, place-making, Ponzi scheme, SimCity, South China Sea, telemarketer, the built environment, The Fortune at the Bottom of the Pyramid, the strength of weak ties, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trade route, urban planning, urban renewal, wikimedia commons

The activities described in this account of Demosthenes reveal a sophisticated understanding of income, risk, and the interconnection of economic activities that nonetheless involved only relatively modest amounts of cash. A drachma was the equivalent of a daily wage for an infantryman, so the sums expended by Demosthenes’s father indicated the cautious, diversified portfolio of a small-scale venture capitalist. He lent money for specific purposes, like trade, and kept multiple accounts against the risk of fraud or bank failure. He made loans for maritime purposes as well as terrestrial ones and used both silver and people as collateral for the loans he made to others.


The Armchair Economist: Economics and Everyday Life by Steven E. Landsburg

Albert Einstein, Arthur Eddington, business cycle, diversified portfolio, Dutch auction, first-price auction, German hyperinflation, Golden Gate Park, information asymmetry, invisible hand, junk bonds, Kenneth Arrow, low interest rates, means of production, price discrimination, profit maximization, Ralph Nader, random walk, Ronald Coase, Sam Peltzman, Savings and loan crisis, sealed-bid auction, second-price auction, second-price sealed-bid, statistical model, the scientific method, Unsafe at Any Speed

If asset prices behave as economists believe they do, most investors should focus not on picking the right assets but on constructing the right portfolios. The question "Is Consolidated Umbrella a good buy?" is meaningless except in the context of an existing portfolio. In conjunction with General Picnic Baskets, Consolidated can compose a well-diversified portfolio. In conjunction with International Raincoats, Consolidated composes a portfolio with a lot of unnecessary risk, courting disaster if the sun comes out. To earn large rewards, you must accept risk. (This is a moral that runs at large, extending beyond the world of high finance.) The trick is to accept no more risk than is necessary.


pages: 251 words: 80,831

Super Founders: What Data Reveals About Billion-Dollar Startups by Ali Tamaseb

"World Economic Forum" Davos, 23andMe, additive manufacturing, Affordable Care Act / Obamacare, Airbnb, Anne Wojcicki, asset light, barriers to entry, Ben Horowitz, Benchmark Capital, bitcoin, business intelligence, buy and hold, Chris Wanstrath, clean water, cloud computing, coronavirus, corporate governance, correlation does not imply causation, COVID-19, cryptocurrency, data science, discounted cash flows, diversified portfolio, Elon Musk, Fairchild Semiconductor, game design, General Magic , gig economy, high net worth, hiring and firing, index fund, Internet Archive, Jeff Bezos, John Zimmer (Lyft cofounder), Kickstarter, late fees, lockdown, Lyft, Marc Andreessen, Marc Benioff, Mark Zuckerberg, Max Levchin, Mitch Kapor, natural language processing, Network effects, nuclear winter, PageRank, PalmPilot, Parker Conrad, Paul Buchheit, Paul Graham, peer-to-peer lending, Peter Thiel, Planet Labs, power law, QR code, Recombinant DNA, remote working, ride hailing / ride sharing, robotic process automation, rolodex, Ruby on Rails, Salesforce, Sam Altman, Sand Hill Road, self-driving car, shareholder value, sharing economy, side hustle, side project, Silicon Valley, Silicon Valley startup, Skype, Snapchat, SoftBank, software as a service, software is eating the world, sovereign wealth fund, Startup school, Steve Jobs, Steve Wozniak, survivorship bias, TaskRabbit, telepresence, the payments system, TikTok, Tony Fadell, Tony Hsieh, Travis Kalanick, Uber and Lyft, Uber for X, uber lyft, ubercab, web application, WeWork, work culture , Y Combinator

A study done by the data science team at AngelList suggests that angel investors who made investments in more companies generated higher returns. (According to one survey, the average angel investor has fourteen companies in their portfolio.) The median investment amount by an angel investor in the United States was $25,000, so angel investors need to put aside a large sum to create a diversified portfolio in which one of the investments has a chance of hitting it big.4 Research done by AngelList suggests that angel investors with larger portfolios were more likely to have higher returns. (“IRR p.a.” means “internal rate of return per annum.”) Source: Abe Othman, “How Portfolio Size Affects Early-Stage Venture Returns,” Angel.Co, April 23, 2020, https://angel.co/blog/how-portfolio Many of these top angels are current or former founders themselves who have cashed out of their startups and remain in the circle of other promising founders.


pages: 366 words: 94,209

Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity by Douglas Rushkoff

activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, algorithmic trading, Amazon Mechanical Turk, Andrew Keen, bank run, banking crisis, barriers to entry, benefit corporation, bitcoin, blockchain, Burning Man, business process, buy and hold, buy low sell high, California gold rush, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, centralized clearinghouse, citizen journalism, clean water, cloud computing, collaborative economy, collective bargaining, colonial exploitation, Community Supported Agriculture, corporate personhood, corporate raider, creative destruction, crowdsourcing, cryptocurrency, data science, deep learning, disintermediation, diversified portfolio, Dutch auction, Elon Musk, Erik Brynjolfsson, Ethereum, ethereum blockchain, fiat currency, Firefox, Flash crash, full employment, future of work, gamification, Garrett Hardin, gentrification, gig economy, Gini coefficient, global supply chain, global village, Google bus, Howard Rheingold, IBM and the Holocaust, impulse control, income inequality, independent contractor, index fund, iterative process, Jaron Lanier, Jeff Bezos, jimmy wales, job automation, Joseph Schumpeter, Kickstarter, Large Hadron Collider, loss aversion, low interest rates, Lyft, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, Marshall McLuhan, means of production, medical bankruptcy, minimum viable product, Mitch Kapor, Naomi Klein, Network effects, new economy, Norbert Wiener, Oculus Rift, passive investing, payday loans, peer-to-peer lending, Peter Thiel, post-industrial society, power law, profit motive, quantitative easing, race to the bottom, recommendation engine, reserve currency, RFID, Richard Stallman, ride hailing / ride sharing, Ronald Reagan, Russell Brand, Satoshi Nakamoto, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Snapchat, social graph, software patent, Steve Jobs, stock buybacks, TaskRabbit, the Cathedral and the Bazaar, The Future of Employment, the long tail, trade route, Tragedy of the Commons, transportation-network company, Turing test, Uber and Lyft, Uber for X, uber lyft, unpaid internship, Vitalik Buterin, warehouse robotics, Wayback Machine, Y Combinator, young professional, zero-sum game, Zipcar

And so, with the help of a salivating financial services industry, the now-ubiquitous 401(k) was legislated into existence.8 A hybrid of the IRA and traditional pension plans, the 401(k) is funded by a monthly percentage of the employee’s salary and, sometimes, an optional contribution from the employer. The employee then picks from a range of diversified portfolios, administered by an outside financial firm. Instead of guaranteeing a lifetime of benefits, employers now only have to provide access to a plan and a matching contribution up front, if that. The employee alone is responsible for whether the plan appreciates, keeps up with inflation, or is invested responsibly.


pages: 291 words: 91,783

Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America by Matt Taibbi

addicted to oil, affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Bear Stearns, Bernie Sanders, Bretton Woods, buy and hold, carried interest, classic study, clean water, collateralized debt obligation, collective bargaining, computerized trading, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, desegregation, diversification, diversified portfolio, Donald Trump, financial innovation, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Greenspan put, illegal immigration, interest rate swap, laissez-faire capitalism, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, medical malpractice, military-industrial complex, money market fund, moral hazard, mortgage debt, Nixon triggered the end of the Bretton Woods system, obamacare, passive investing, Ponzi scheme, prediction markets, proprietary trading, prudent man rule, quantitative easing, reserve currency, Ronald Reagan, Savings and loan crisis, Sergey Aleynikov, short selling, sovereign wealth fund, too big to fail, trickle-down economics, Y2K, Yom Kippur War

At least that’s what Goldman Sachs told its institutional investors back in 2005, in a pamphlet entitled Investing and Trading in the Goldman Sachs Commodities Index, given out mainly to pension funds and the like. Commodities like oil and gas, Goldman argued, would provide investors with “equity-like returns” while diversifying portfolios and therefore reducing risk. These investors were encouraged to make a “broadly-diversified, long-only, passive investment” in commodity indices. But there were several major problems with this kind of thinking—i.e., the notion that the prices of oil and gas and wheat and soybeans were something worth investing in for the long term, the same way one might invest in stock.


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, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, Boeing 747, book value, 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, Eyjafjallajökull, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, foreign exchange controls, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, junk bonds, Kenneth Rogoff, lateral thinking, Lewis Mumford, London Whale, Long Term Capital Management, market bubble, Michael Milken, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, proprietary trading, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, Sam Peltzman, savings glut, scientific management, subprime mortgage crisis, tail risk, technology bubble, TED Talk, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

Deep downturns in Massachusetts and Texas had sent many local banks over the edge. MBSs made it possible to pool loans from around the country, diluting the effect of a housing bust in any region on the overall portfolio. Because historically prices never fell on a nationwide basis, investors were much more comfortable holding a diversified portfolio of mortgages. The diversification benefits of MBSs both reduced the cost of borrowing for everybody and expanded the influx of credit into the mortgage market. Investors, believing that nationwide home prices could never go down, acted in a way that guaranteed they would. Certainly, some bankers and investors suspected that home prices were poised to fall and that MBSs sold as safe would turn out not to be.


pages: 265 words: 93,231

The Big Short: Inside the Doomsday Machine by Michael Lewis

Alan Greenspan, An Inconvenient Truth, Asperger Syndrome, asset-backed security, Bear Stearns, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, facts on the ground, financial engineering, financial innovation, fixed income, forensic accounting, Gordon Gekko, high net worth, housing crisis, illegal immigration, income inequality, index fund, interest rate swap, John Meriwether, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, medical residency, Michael Milken, money market fund, moral hazard, mortgage debt, pets.com, Ponzi scheme, Potemkin village, proprietary trading, quantitative trading / quantitative finance, Quicken Loans, risk free rate, Robert Bork, short selling, Silicon Valley, tail risk, the new new thing, too big to fail, value at risk, Vanguard fund, zero-sum game

Their--soon to be everyone's--nifty solution to the problem of selling the lower floors appears, in retrospect, almost magical. Having gathered 100 ground floors from 100 different subprime mortgage buildings (100 different triple-B-rated bonds), they persuaded the rating agencies that these weren't, as they might appear, all exactly the same things. They were another diversified portfolio of assets! This was absurd. The 100 buildings occupied the same floodplain; in the event of flood, the ground floors of all of them were equally exposed. But never mind: The rating agencies, who were paid fat fees by Goldman Sachs and other Wall Street firms for each deal they rated, pronounced 80 percent of the new tower of debt triple-A.


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

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

This is the nightmare of every drug and biotech company, and indeed, investors’ reaction was swift and harsh: Prosensa’s stock plunged 70 percent on the announcement of the trial’s failure. It was not a total loss, though, since the stock of Sarepta Therapeutics Inc., a competing biotech firm developing an alternative muscular dystrophy drug increased 18 percent on Prosensa’s failure announcement. One company’s loss is another’s gain. Large drug companies, with diversified portfolios of drugs under development, aren’t hit as hard by clinical test failures, but they are hit nevertheless. The large British pharmaceutical company AstraZeneca lost 2.5 percent of its stock price around August 8, 2012, when it announced an unsuccessful Phase IIb test of its treatment for severe sepsis.


pages: 299 words: 91,839

What Would Google Do? by Jeff Jarvis

"World Economic Forum" Davos, 23andMe, Amazon Mechanical Turk, Amazon Web Services, Anne Wojcicki, AOL-Time Warner, barriers to entry, Berlin Wall, bike sharing, business process, call centre, carbon tax, cashless society, citizen journalism, clean water, commoditize, connected car, content marketing, credit crunch, crowdsourcing, death of newspapers, different worldview, disintermediation, diversified portfolio, don't be evil, Dunbar number, fake news, fear of failure, Firefox, future of journalism, G4S, Golden age of television, Google Earth, Googley, Howard Rheingold, informal economy, inventory management, Jeff Bezos, jimmy wales, John Perry Barlow, Kevin Kelly, Marc Benioff, Mark Zuckerberg, moral hazard, Network effects, new economy, Nicholas Carr, old-boy network, PageRank, peer-to-peer lending, post scarcity, prediction markets, pre–internet, Ronald Coase, Salesforce, search inside the book, Sheryl Sandberg, Silicon Valley, Skype, social graph, social software, social web, spectrum auction, speech recognition, Steve Jobs, the long tail, the medium is the message, The Nature of the Firm, the payments system, The Wisdom of Crowds, transaction costs, web of trust, WikiLeaks, Y Combinator, Zipcar

The root of the credit crisis that spread from America around the globe in 2008 was that bad loans were hidden in packages with good loans and sold to financial markets, with no accountability down to the level of each loan and no transparency. That’s not the case in these peer-to-peer loan operations. I don’t mean to pretend that the social banking system could replace banks, but banks could learn a lot from it. Why not set up direct marketplaces that let me establish my own diversified portfolio in small-business loans, home mortgages, and student loans? Why not use the infrastructure the bank has, as Virgin Money and PayPal do, to facilitate our own financial transactions? Why not make banks human again? We may not see such an evolution in big, old banks—they’re just too big and old.


pages: 326 words: 88,968

The Science and Technology of Growing Young: An Insider's Guide to the Breakthroughs That Will Dramatically Extend Our Lifespan . . . And What You Can Do Right Now by Sergey Young

23andMe, 3D printing, Albert Einstein, artificial general intelligence, augmented reality, basic income, Big Tech, bioinformatics, Biosphere 2, brain emulation, caloric restriction, caloric restriction, Charles Lindbergh, classic study, clean water, cloud computing, cognitive bias, computer vision, coronavirus, COVID-19, CRISPR, deep learning, digital twin, diversified portfolio, Doomsday Clock, double helix, Easter island, Elon Musk, en.wikipedia.org, epigenetics, European colonialism, game design, Gavin Belson, George Floyd, global pandemic, hockey-stick growth, impulse control, Internet of things, late capitalism, Law of Accelerating Returns, life extension, lockdown, Lyft, Mark Zuckerberg, meta-analysis, microbiome, microdosing, moral hazard, mouse model, natural language processing, personalized medicine, plant based meat, precision agriculture, radical life extension, Ralph Waldo Emerson, Ray Kurzweil, Richard Feynman, ride hailing / ride sharing, Ronald Reagan, self-driving car, seminal paper, Silicon Valley, stem cell, Steve Jobs, tech billionaire, TED Talk, uber lyft, ultra-processed food, universal basic income, Virgin Galactic, Vision Fund, X Prize

In particular, having a spouse or other life partner can add three years to your life. We probably all know a long-term couple who have died within three months of each other. This phenomenon is so common that it has a name—the widowhood effect. I myself am blessed with both of my parents, a wonderful wife, and a “diversified portfolio” of four amazing children. I enjoy a robust network of friends and colleagues all around the world. So I wondered—How can I advise people to boost their longevity with social connections? To help me with the answer, I turned to my close friend and business coach, Keith Ferrazzi, author of the best-selling book Never Eat Alone: and Other Secrets to Success, One Relationship at a Time.


pages: 420 words: 94,064

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

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

Index funds that trade like stocks offered by Vanguard, iShares, Schwab, and others cost as little as 0.03 percent a year now for access to hundreds or even thousands of stocks. I own several through my discount broker, and buying a little bit more when I save some money or receive a dividend is (almost) free. The price of those funds is hard to beat, but maybe you want to construct your own diversified portfolio of a couple of dozen stocks to buy and hold. There are plenty of good places to look online for advice (sorry apes, probably not WallStreetBets). For example, you might be bothered (or delighted) that Tesla is one of the largest stocks in the benchmark stock index that many funds follow and want to tweak things accordingly.


pages: 327 words: 102,322

Losing the Signal: The Spectacular Rise and Fall of BlackBerry by Jacquie McNish, Sean Silcoff

"World Economic Forum" Davos, Albert Einstein, Andy Rubin, Carl Icahn, Clayton Christensen, corporate governance, diversified portfolio, indoor plumbing, Iridium satellite, Jeff Hawkins, junk bonds, Marc Benioff, Mary Meeker, Michael Milken, PalmPilot, patent troll, QWERTY keyboard, rolodex, Salesforce, Silicon Valley, Silicon Valley startup, skunkworks, Skype, Stephen Fry, Stephen Hawking, Steve Ballmer, Steve Jobs, the new new thing

Wearing a tan jacket and a blue T-shirt, Balsillie sat down with George Stroumboulopoulos, host of a popular Canadian Broadcasting Corporation TV show. Referencing the popular iPhone, Stroumboulopoulos asked if it was time to add to RIM’s lineup: “Do you ever look at it and go, ‘What are we going to do if this isn’t our primary business, growing RIM beyond … a BlackBerry?’ ” “Um, no,” Balsillie laughed, “we’re a very poorly diversified portfolio.” “You’re just going to focus on one thing!” said Stroumboulopoulos. “It either goes to the moon or it crashes to Earth,” Balsillie replied. In the spring of 2008, no one believed RIM would flame out. Its stock market value was more than $70 billion, quarterly revenues were up 100 percent from the previous year, and the company sold sixty thousand BlackBerrys daily.


pages: 111 words: 1

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb

Alan Greenspan, Antoine Gombaud: Chevalier de Méré, availability heuristic, backtesting, behavioural economics, Benoit Mandelbrot, Black Swan, commoditize, complexity theory, corporate governance, corporate raider, currency peg, Daniel Kahneman / Amos Tversky, discounted cash flows, diversified portfolio, endowment effect, equity premium, financial engineering, fixed income, global village, hedonic treadmill, hindsight bias, junk bonds, Kenneth Arrow, Linda problem, Long Term Capital Management, loss aversion, mandelbrot fractal, Mark Spitznagel, Market Wizards by Jack D. Schwager, mental accounting, meta-analysis, Michael Milken, Myron Scholes, PalmPilot, Paradox of Choice, Paul Samuelson, power law, proprietary trading, public intellectual, quantitative trading / quantitative finance, QWERTY keyboard, random walk, Richard Feynman, risk free rate, road to serfdom, Robert Shiller, selection bias, shareholder value, Sharpe ratio, Steven Pinker, stochastic process, survivorship bias, too big to fail, Tragedy of the Commons, Turing test, Yogi Berra

When the market started dipping in June, his friendly sources informed him that the sell-off was merely the result of a “liquidation” by a New Jersey hedge fund run by a former Wharton professor. That fund specialized in mortgage securities and had just received instructions to wind down the overall inventory. The inventory included some Russian bonds, mostly because yield hogs, as these funds are known, engage in the activity of building a “diversified” portfolio of high-yielding securities. Averaging Down When the market started falling, he accumulated more Russian bonds, at an average of around $52. That was Carlos’ trait, average down. The problems, he deemed, had nothing to do with Russia, and it was not some New Jersey fund run by some mad scientist that was going to decide the fate of Russia.


pages: 414 words: 101,285

The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do About It by Ian Goldin, Mike Mariathasan

air freight, air traffic controllers' union, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, behavioural economics, Berlin Wall, biodiversity loss, Bretton Woods, BRICs, business cycle, butterfly effect, carbon tax, clean water, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, connected car, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, digital divide, discovery of penicillin, diversification, diversified portfolio, Douglas Engelbart, Douglas Engelbart, Edward Lorenz: Chaos theory, energy security, eurozone crisis, Eyjafjallajökull, failed state, Fairchild Semiconductor, Fellow of the Royal Society, financial deregulation, financial innovation, financial intermediation, fixed income, Gini coefficient, Glass-Steagall Act, global pandemic, global supply chain, global value chain, global village, high-speed rail, income inequality, information asymmetry, Jean Tirole, John Snow's cholera map, Kenneth Rogoff, light touch regulation, Long Term Capital Management, market bubble, mass immigration, megacity, moral hazard, Occupy movement, offshore financial centre, open economy, precautionary principle, profit maximization, purchasing power parity, race to the bottom, RAND corporation, regulatory arbitrage, reshoring, risk free rate, Robert Solow, scientific management, Silicon Valley, six sigma, social contagion, social distancing, Stuxnet, supply-chain management, systems thinking, tail risk, TED Talk, The Great Moderation, too big to fail, Toyota Production System, trade liberalization, Tragedy of the Commons, transaction costs, uranium enrichment, vertical integration

These need to be radically reappraised, taking into account both the externalities associated with current use and the sustainability of economic growth as the primary and often the only goal of economic policy.17 Degrading Biodiversity The value of biodiversity can be summarized simply: “Diversity expands the number of potential interactions inside a system and therefore offers, on average, higher stability and resilience.”18 This is true for diversified portfolios in finance, for modular supply chains in global production, and also for our ecosystem. It therefore follows that a loss of biodiversity implies heightened instability and a reduced capacity to withstand shocks. It is worth emphasizing that such threats are not merely hypothetical. According to one study, the spread of invasive species and pathogens constitutes “the clearest link between biodiversity and human health.”19 Indeed, risks are already materializing in many domains; the Food and Agriculture Organization of the United Nations estimates that “over 70% of the world’s fish species are either fully exploited or depleted,” posing a “major threat” to the food supply of millions of people.20 Empirically, declines in biodiversity are typically “followed by an increase in the incidence of diseases and in the presence of invasive species.”21 Furthermore, biodiversity has also been identified as instrumental to medical research and even to commercial agriculture.


Mathematics for Finance: An Introduction to Financial Engineering by Marek Capinski, Tomasz Zastawniak

Black-Scholes formula, Brownian motion, capital asset pricing model, cellular automata, delta neutral, discounted cash flows, discrete time, diversified portfolio, financial engineering, fixed income, interest rate derivative, interest rate swap, locking in a profit, London Interbank Offered Rate, margin call, martingale, quantitative trading / quantitative finance, random walk, risk free rate, short selling, stochastic process, time value of money, transaction costs, value at risk, Wiener process, zero-coupon bond

Does either of the strategies in the proof of Proposition 6.2 give an arbitrage profit if F (0, 1) = 89 and S(0) = 83 dollars, and a $2 dividend is paid in the middle of the year, that is, at time 1/2? Dividend Yield. Dividends are often paid continuously at a specified rate, rather than at discrete time instants. For example, in a case of a highly diversified portfolio of stocks it is natural to assume that dividends are paid continuously rather than to take into account frequent payments scattered throughout the year. Another example is foreign currency, attracting interest at the corresponding rate. We shall first derive a formula for the forward price in the case of foreign currency.


pages: 354 words: 105,322

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

"World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, blockchain, Boeing 747, Bonfire of the Vanities, Bretton Woods, Brexit referendum, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, currency risk, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, driverless car, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, Glass-Steagall Act, global macro, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, low interest rates, machine readable, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Minsky moment, Money creation, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, operational security, Paul Samuelson, Peace of Westphalia, Phillips curve, Pierre-Simon Laplace, plutocrats, prediction markets, price anchoring, price stability, proprietary trading, public intellectual, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk free rate, risk-adjusted returns, Robert Solow, Ronald Reagan, Savings and loan crisis, Silicon Valley, sovereign wealth fund, special drawing rights, stock buybacks, stocks for the long run, tech billionaire, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, We are all Keynesians now, Westphalian system

Likewise, the failure of prominent banks seems to be a problem society has learned to manage. Stock investors in failed firms may suffer losses, yet depositors and account holders are routinely bailed out by deposit insurance and government guarantees. Even stock losses are manageable if they are part of larger diversified portfolios. After the crashes in 1987, 1998, 2000, and 2008, the market bounced back and rose to new highs. Why should investors be concerned about collapse? The archetype for collapse in a complex system is not New Madrid or San Francisco. The archetype is Krakatoa. In 1883, the island of Krakatoa in the Sunda Strait between Sumatra and Java exploded with a force thirteen thousand times greater than the Hiroshima bomb.


pages: 416 words: 106,532

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

Airbnb, Alan Greenspan, altcoin, Alvin Toffler, asset allocation, asset-backed security, autonomous vehicles, Bear Stearns, bitcoin, Bitcoin Ponzi scheme, blockchain, Blythe Masters, book value, business cycle, business process, buy and hold, capital controls, carbon tax, Carmen Reinhart, Clayton Christensen, clean water, cloud computing, collateralized debt obligation, commoditize, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, disintermediation, distributed ledger, diversification, diversified portfolio, Dogecoin, Donald Trump, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, fiat currency, financial engineering, financial innovation, fixed income, Future Shock, general purpose technology, George Gilder, Google Hangouts, high net worth, hype cycle, information security, initial coin offering, it's over 9,000, Jeff Bezos, Kenneth Rogoff, Kickstarter, Leonard Kleinrock, litecoin, low interest rates, Marc Andreessen, Mark Zuckerberg, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, packet switching, passive investing, peer-to-peer, peer-to-peer lending, Peter Thiel, pets.com, Ponzi scheme, prediction markets, quantitative easing, quantum cryptography, RAND corporation, random walk, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Ross Ulbricht, Salesforce, Satoshi Nakamoto, seminal paper, Sharpe ratio, Silicon Valley, Simon Singh, Skype, smart contracts, social web, South Sea Bubble, Steve Jobs, transaction costs, tulip mania, Turing complete, two and twenty, Uber for X, Vanguard fund, Vitalik Buterin, WikiLeaks, Y2K

The impact of this is seen in a 2015 survey among financial advisors that found they had placed 73 percent of their clients in alternative investments, and that nearly three-quarters of advisors planned to maintain their current alternative investment allocations.14 The survey also showed that in terms of asset allocation, most advisors were recommending a range of 6 percent to 15 percent of a client’s portfolio in alternatives. A smaller but not insignificant percentage of advisors recommended 16 percent to 25 percent of their clients’ portfolios in alternatives. Bitcoin and other cryptoassets are alternative assets that can be safely and successfully incorporated into well-diversified portfolios to meet these asset allocation recommendations.15 However, every alternative investment has its unique set of characteristics, and the innovative investor must understand these. The potential of bitcoin and other cryptoassets is so great that we believe they should be considered an asset class of their own.


pages: 484 words: 104,873

Rise of the Robots: Technology and the Threat of a Jobless Future by Martin Ford

3D printing, additive manufacturing, Affordable Care Act / Obamacare, AI winter, algorithmic management, algorithmic trading, Amazon Mechanical Turk, artificial general intelligence, assortative mating, autonomous vehicles, banking crisis, basic income, Baxter: Rethink Robotics, Bernie Madoff, Bill Joy: nanobots, bond market vigilante , business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Charles Babbage, Chris Urmson, Clayton Christensen, clean water, cloud computing, collateralized debt obligation, commoditize, computer age, creative destruction, data science, debt deflation, deep learning, deskilling, digital divide, disruptive innovation, diversified portfolio, driverless car, Erik Brynjolfsson, factory automation, financial innovation, Flash crash, Ford Model T, Fractional reserve banking, Freestyle chess, full employment, general purpose technology, Geoffrey Hinton, Goldman Sachs: Vampire Squid, Gunnar Myrdal, High speed trading, income inequality, indoor plumbing, industrial robot, informal economy, iterative process, Jaron Lanier, job automation, John Markoff, John Maynard Keynes: technological unemployment, John von Neumann, Kenneth Arrow, Khan Academy, Kiva Systems, knowledge worker, labor-force participation, large language model, liquidity trap, low interest rates, low skilled workers, low-wage service sector, Lyft, machine readable, machine translation, manufacturing employment, Marc Andreessen, McJob, moral hazard, Narrative Science, Network effects, new economy, Nicholas Carr, Norbert Wiener, obamacare, optical character recognition, passive income, Paul Samuelson, performance metric, Peter Thiel, plutocrats, post scarcity, precision agriculture, price mechanism, public intellectual, Ray Kurzweil, rent control, rent-seeking, reshoring, RFID, Richard Feynman, Robert Solow, Rodney Brooks, Salesforce, Sam Peltzman, secular stagnation, self-driving car, Silicon Valley, Silicon Valley billionaire, Silicon Valley startup, single-payer health, software is eating the world, sovereign wealth fund, speech recognition, Spread Networks laid a new fibre optics cable between New York and Chicago, stealth mode startup, stem cell, Stephen Hawking, Steve Jobs, Steven Levy, Steven Pinker, strong AI, Stuxnet, technological singularity, telepresence, telepresence robot, The Bell Curve by Richard Herrnstein and Charles Murray, The Coming Technological Singularity, The Future of Employment, the long tail, Thomas L Friedman, too big to fail, Tragedy of the Commons, Tyler Cowen, Tyler Cowen: Great Stagnation, uber lyft, union organizing, Vernor Vinge, very high income, warehouse automation, warehouse robotics, Watson beat the top human players on Jeopardy!, women in the workforce

Most of these proposals involve strategies like somehow increasing employee stock ownership in businesses or simply giving everyone a substantial balance in a mutual fund. In an article for The Atlantic, economist Noah Smith suggests that the government could give everyone “an endowment of capital” by purchasing a “diversified portfolio of equity” for every citizen when he or she turns eighteen. A rash decision to “cash out, and party” would be “prevented with some fairly light paternalism, like temporary ‘lock-up’ provisions.”18 The problem with this is that “light paternalism” might not be enough. Imagine a future in which your ability to survive economically is determined almost exclusively by what you own; your labor is worth little or nothing.


pages: 389 words: 109,207

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

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

His name was Michael Milken. Michael Milken IN HIS OWN WAY, Milken founded his career on the less-than-perfect efficiency of the market. As a Berkeley business student, Milken came across a study by W. Braddock Hickman on the bonds of companies with poor credit ratings. Hickman determined that a diversified portfolio of these neglected bonds was in fact a relatively safe and high-yielding investment. His study examined the period from 1900 to 1943. No one paid much attention to Hickman’s study except for Milken and a certain T. R. Atkinson, who extended it to cover the period 1944–65 and came to much the same conclusion.


pages: 368 words: 32,950

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

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

Since February 2001, the industry standard for settlement of shares held in nominee accounts has been T + 3, meaning that both counterparties to a trade agree to settle a trade three business days after the trade date, although market makers, as opposed to the electronic order book, can offer some flexibility. For paper share certificates, it is T + 10. Some private investors dabble on a one-off basis in the stock market but for those with a more sophisticated approach, the conventional wisdom is to build a diversified portfolio, investing in a number of companies, each in a different sector. This way, the risk is spread. If one share falls in value, the others may outperform, balancing out overall performance. On a broader scale, investments may be diversified across assets and countries. Bonds are less risky assets than equities, and cash deposits are the safest asset class of all.


pages: 417 words: 109,367

The End of Doom: Environmental Renewal in the Twenty-First Century by Ronald Bailey

3D printing, additive manufacturing, agricultural Revolution, Albert Einstein, Anthropocene, Asilomar, autonomous vehicles, biodiversity loss, business cycle, carbon tax, Cass Sunstein, Climatic Research Unit, commodity super cycle, conceptual framework, corporate governance, creative destruction, credit crunch, David Attenborough, decarbonisation, dematerialisation, demographic transition, disinformation, disruptive innovation, diversified portfolio, double helix, energy security, failed state, financial independence, Ford Model T, Garrett Hardin, Gary Taubes, Great Leap Forward, hydraulic fracturing, income inequality, Induced demand, Intergovernmental Panel on Climate Change (IPCC), invisible hand, knowledge economy, meta-analysis, Naomi Klein, negative emissions, Neolithic agricultural revolution, ocean acidification, oil shale / tar sands, oil shock, pattern recognition, peak oil, Peter Calthorpe, phenotype, planetary scale, precautionary principle, price stability, profit motive, purchasing power parity, race to the bottom, RAND corporation, Recombinant DNA, rent-seeking, rewilding, Stewart Brand, synthetic biology, systematic bias, Tesla Model S, trade liberalization, Tragedy of the Commons, two and twenty, University of East Anglia, uranium enrichment, women in the workforce, yield curve

With the current US tax breaks, the low-end solar PV utility-scale costs is $56 per megawatt-hour. Even so, George Bilicic, a vice chairman of Lazard, concluded that utilities “still require conventional technologies to meet the energy needs of a developed economy, but they are using alternative technologies to create diversified portfolios of power generation resources.” Every couple of years the Electric Power Research Institute, a nonprofit think tank sponsored by the electric power generation industry, issues a report on the levelized cost of energy for various power generation technologies. Its Integrated Generation Technology Options 2012 report calculates the low-end levelized cost for solar PV next year at $107 per megawatt-hour.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Alan Greenspan, balance sheet recession, bank run, banking crisis, barriers to entry, Bear Stearns, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, bond market vigilante , Bretton Woods, British Empire, business cycle, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, Goodhart's law, Greenspan put, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, junk bonds, Kenneth Rogoff, Kickstarter, labour market flexibility, Les Trente Glorieuses, light touch regulation, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, market clearing, Martin Wolf, Minsky moment, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, Suez crisis 1956, The Chicago School, 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 Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

Low yields on British government debt (gilts) caused the prosperous middle classes to buy bonds in Argentine railways in search of higher incomes (an early version of the ‘search for yield’ that would be seen in the current era). The quaintly named Foreign & Colonial Investment Trust, founded in 1868 but still around today, was a fund designed to offer Victorians a diversified portfolio; it acquired investments in Argentina, Brazil, Chile, Russia, Spain and Turkey. The initial yield was 7 per cent at a time when gilts offered just 3 per cent. Trade flowed round the globe. The arrival of steamships in the mid-nineteenth century opened up the possibility of exporting wheat from the US and meat from Argentina to the hungry European markets.


pages: 370 words: 112,602

Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty by Abhijit Banerjee, Esther Duflo

"World Economic Forum" Davos, Albert Einstein, Andrei Shleifer, business process, business process outsourcing, call centre, Cass Sunstein, charter city, clean water, collapse of Lehman Brothers, congestion charging, demographic transition, diversified portfolio, experimental subject, hiring and firing, Kickstarter, land tenure, low interest rates, low skilled workers, M-Pesa, microcredit, moral hazard, purchasing power parity, randomized controlled trial, Richard Thaler, school vouchers, Silicon Valley, The Fortune at the Bottom of the Pyramid, Thomas Malthus, tontine, urban planning

The result is that the same kind of drought has a more negative effect on wages in those villages in India that are more isolated, where it is harder for workers to go outside to look for work. In those places, working more is not necessarily an effective way of coping with getting paid less.9 If coping by working more after the shock hits is not really a good option, the best bet is often to try to limit exposure to risk by building, like a hedge-fund manager, a diversified portfolio, and it is clear that the poor invest a lot of ingenuity in doing so. The only difference is that they diversify activities, not just financial instruments. One striking fact about the poor is the sheer number of occupations that a single family seems to be involved in: In a survey of twenty-seven villages in West Bengal, even households that claimed to farm a piece of land spent only 40 percent of their time farming.10 The median family in this survey had three working members and seven occupations.


pages: 408 words: 108,985

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity by Joseph E. Stiglitz

"World Economic Forum" Davos, accelerated depreciation, Airbnb, Alan Greenspan, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, basic income, behavioural economics, benefit corporation, Berlin Wall, bilateral investment treaty, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, deindustrialization, discovery of DNA, diversified portfolio, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial engineering, financial intermediation, Francis Fukuyama: the end of history, full employment, gender pay gap, George Akerlof, gig economy, Gini coefficient, Glass-Steagall Act, hiring and firing, housing crisis, Hyman Minsky, income inequality, independent contractor, inflation targeting, informal economy, information asymmetry, intangible asset, investor state dispute settlement, invisible hand, Isaac Newton, labor-force participation, liberal capitalism, low interest rates, low skilled workers, market fundamentalism, mini-job, moral hazard, non-tariff barriers, offshore financial centre, open economy, Paris climate accords, patent troll, pension reform, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Ronald Reagan, selection bias, shareholder value, Silicon Valley, sovereign wealth fund, TaskRabbit, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, tulip mania, universal basic income, unorthodox policies, vertical integration, zero-sum game

Thus, it is worrying that many in Europe are actively encouraging the revival of securitization markets without adequately taking into account their risks and limitations. What is needed is to strengthen the banking system (especially local, regional, and cooperative banks). Information, especially concerning small borrowers, is best acquired and processed through such institutions. Risk diversification can be achieved by those who wish to own a diversified portfolio of bank shares. There is little extra benefit in risk diversification that is achieved through securitization, while the evident costs are enormous. The EU’s excessive focus on strengthening capital markets is very misguided. While improving capital markets is desirable, doing so will not solve the fundamental problems facing the financial sector.


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

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

Lawsuits of this sort are difficult to win because they must show that the plan's trustees knew the company stock was a poor investment and offered it on the menu of choices anyway. The moral: be your own guardian of your 401(k), and keep the percentage of company stock below 10 percent. Any more than that and you don't have a well-diversified portfolio. What Happens If I Leave My Company Before I Retire? A 401(k) is portable; that is, you get to take it with you if you leave your employer. If you leave prior to reaching age fifty-nine and a half, you have four options: • Leave your investments with the old employer's plan. Some employers allow workers to maintain 401(k) investments even after leaving the company.


pages: 407 words: 104,622

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

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

But adding foreign-market algorithms and improving Medallion’s trading techniques sent its Sharpe soaring to about 6.0 in early 2003, about twice the ratio of the largest quant firms and a figure suggesting there was nearly no risk of the fund losing money over a whole year. Simons’s team appeared to have discovered something of a holy grail in investing: enormous returns from a diversified portfolio generating relatively little volatility and correlation to the overall market. In the past, a few others had developed investment vehicles with similar characteristics. They usually had puny portfolios, however. No one had achieved what Simons and his team had—a portfolio as big as $5 billion delivering this kind of astonishing performance.


pages: 368 words: 106,185

A Shot to Save the World: The Inside Story of the Life-Or-Death Race for a COVID-19 Vaccine by Gregory Zuckerman

"World Economic Forum" Davos, Albert Einstein, blockchain, Boris Johnson, contact tracing, coronavirus, COVID-19, diversified portfolio, Donald Trump, double helix, Edward Jenner, future of work, Recombinant DNA, ride hailing / ride sharing, Silicon Valley, sovereign wealth fund, stealth mode startup, stem cell, Steve Jobs, TikTok, Travis Kalanick, WeWork

he told Rossi, showing more anger than his labmates had before seen from him. Warren was forty-nine years old. He wanted a job as a professor. Publications are currency of the realm in the world of academic science. As a lab leader, Rossi was overseeing dozens of projects, any one of which could be a home-run study, boosting his career. It was a diversified portfolio of promising bets, but all Warren had was the mRNA work. Competitors were getting closer and Warren was growing anxious. “My career was hanging on this,” Warren says. “If someone beats me it doesn’t matter how good a job I’ve done, I get nothing.” To Rossi, Warren’s nervousness was unjustified.


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

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

In other words, the higher the level of correlation among the individual securities in your portfolio, the lower the benefits of diversification you are likely to derive. Intuitively, this makes sense, and the use of correlation analysis is entirely compatible with the fundamental strategy of selecting securities with differing underlying economic characteristics. However, while the qualitative approach to constructing a diversified portfolio may in most cases appear to be sufficient, correlation analysis will add accuracy and precision to the process. Often enough, the apparent commonalities (or lack thereof) among positions in your portfolio will be deceiving, and you will inevitably run into situations where financial instruments that have little or no economic overlap are in fact highly correlated, as well as those where seemingly closely related securities offer widely divergent pricing characteristics.


pages: 426 words: 115,150

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

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

If, in addition to index funds, you were to choose only one new investment strategy that could mirror this approach, it would have to be investing in mutual funds known as “lifestyle funds.” This all-in-one concept seems uniquely designed for an FI investment plan because the management fees are low, the plan is simple to manage and it enables inexperienced investors to quickly establish a well-diversified portfolio that reduces market risk. The beauty of lifestyle funds is that with the purchase of one mutual fund you end up owning five funds spread across a variety of asset classes. For example, a lifestyle fund might divide its holdings among the U.S stock market, the U.S. bond market, the international stock index and a variety of other options.


pages: 358 words: 119,272

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

Alan Greenspan, Albert Einstein, asset allocation, banking crisis, Bear Stearns, behavioural economics, book value, Bretton Woods, business cycle, buy and hold, collective bargaining, Columbine, cuban missile crisis, desegregation, diversified portfolio, fake news, financial engineering, floating exchange rates, Fractional reserve banking, full employment, Glass-Steagall Act, global macro, hindsight bias, Kickstarter, Long Term Capital Management, low interest rates, market bubble, Michael Milken, military-industrial complex, Money creation, mortgage tax deduction, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, oil shock, price stability, reserve currency, risk free rate, Robert Gordon, Robert Shiller, Ronald Reagan, short selling, stocks for the long run, yield curve, Yogi Berra

Unfortunately, Ford’s aphorism became imbedded in the academic approach to financial markets in 1952 when Harry M. Markowitz published his paper ‘Portfolio Selection’. [2] This paper began an assault by academia on the value of history to investors. Markowitz assumed markets were efficient, and he came to some clear conclusions about the benefits of building a diversified portfolio of stocks. This dalliance of science with the concept of efficiency in relation to financial markets soon became a courtship and marriage in the form of the “efficient market hypothesis”. The birth of this theory was, for many, proof that history was indeed “bunk”. What value, they asked, can there be in studying the history of financial markets if the stock market efficiently and immediately reflected all available information?


pages: 288 words: 16,556

Finance and the Good Society by Robert J. Shiller

Alan Greenspan, Alvin Roth, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, benefit corporation, Bernie Madoff, buy and hold, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, democratizing finance, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial engineering, financial innovation, financial thriller, fixed income, full employment, fundamental attribution error, George Akerlof, Great Leap Forward, Ida Tarbell, income inequality, information asymmetry, invisible hand, John Bogle, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, Right to Buy, road to serfdom, Robert Shiller, Ronald Reagan, selection bias, self-driving car, shareholder value, Sharpe ratio, short selling, Simon Kuznets, Skype, social contagion, Steven Pinker, tail risk, telemarketer, Thales and the olive presses, Thales of Miletus, The Market for Lemons, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, zero-sum game, Zipcar

See also futures markets; mortgage securities; options developing countries: insurance, 66–67; microfinance, 44; philanthropy in, 126 De Waal, Frans, 227 Diagnostic and Statistical Manual of Mental Disorders (DSM- IV), 179 directors. See boards of directors disquiet, and inequality, 141–42 diversified portfolios, 28, 29 Dixit, Avinash K., 76 Djilas, Milovan, 25 Dodd-Frank Wall Street Reform and Consumer Protection Act, 23, 43, 51, 114, 154, 184, 217 Domenici, Pete, 192 Donaldson, Lufkin & Jenrette, 176 donor-advised funds, 207 dopamine system, 59–60, 139–40, 245n4 (Chapter 6) Douglas, William O., 209–10 DreamWorks Studios, 189 DSM-IV.


pages: 460 words: 122,556

The End of Wall Street by Roger Lowenstein

"World Economic Forum" Davos, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, benefit corporation, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, break the buck, Brownian motion, Carmen Reinhart, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fear of failure, financial deregulation, financial engineering, fixed income, geopolitical risk, Glass-Steagall Act, Greenspan put, high net worth, Hyman Minsky, interest rate derivative, invisible hand, junk bonds, Ken Thompson, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Martin Wolf, Michael Milken, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, Ponzi scheme, profit motive, race to the bottom, risk tolerance, Ronald Reagan, Rubik’s Cube, Savings and loan crisis, savings glut, short selling, sovereign wealth fund, statistical model, the payments system, too big to fail, tulip mania, Y2K

The problem was that homeowners weren’t molecules, and finance wasn’t physics. Merrill hired John Breit, a particle theorist, as a risk manager, and Breit tried to explain to his peers that the laws of Brownian motion didn’t truly describe finance—this wasn’t science, it was pseudoscience. The models said a diversified portfolio of municipal bonds would lose money once every 10,000 years, but as Breit pointed out, such a portfolio had been devastated merely 150 years ago, during the Civil War. With regard to Merrill’s portfolio of CDOs, the firm judged its potential loss to be “$71.3 million.”6 This was absurd—not because the number was high or low, but because of the arrogance and self-delusion embedded in such fine, decimal-point precision.


pages: 519 words: 118,095

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

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

If you don't want to mess with allocating assets, consider plunking down some cash for just one investment. Two good options are lifecycle funds and all-in-one funds. These might not suit your needs perfectly, but they're a fine place to start. Lifecycle funds Many mutual-fund companies now offer lifecycle funds (also called target-date funds), which try to create a diversified portfolio that's appropriate for a specific age group. For example, say you were born around 1970. In that case, you might consider a fund like Fidelity Freedom 2035, which includes a mix of investments that make sense for people who plan to retire in 2035 (when they'll be around 65). Lifecycle funds have a lot of things going for them.


pages: 482 words: 125,973

Competition Demystified by Bruce C. Greenwald

additive manufacturing, airline deregulation, AltaVista, AOL-Time Warner, asset allocation, barriers to entry, book value, business cycle, creative destruction, cross-subsidies, deindustrialization, discounted cash flows, diversified portfolio, Do you want to sell sugared water for the rest of your life?, Everything should be made as simple as possible, fault tolerance, intangible asset, John Nash: game theory, Nash equilibrium, Network effects, new economy, oil shock, packet switching, PalmPilot, Pepsi Challenge, pets.com, price discrimination, price stability, revenue passenger mile, search costs, selective serotonin reuptake inhibitor (SSRI), shareholder value, Silicon Valley, six sigma, Steve Jobs, transaction costs, vertical integration, warehouse automation, yield management, zero-sum game

Also, when this capital is deployed within the company, rather than distributed to shareholders for their investments, it avoids the tax on either dividends or capital gains. A separate diversification savings occurs when a company like Berkshire Hathaway acquires a privately held company in exchange for Berkshire stock. This enables the selling owners to buy into Berkshire’s diversified portfolio of businesses without having to pay the capital gains they would owe if they sold their company for cash and reinvested the proceeds. Tax savings are thus an important justification in this case, which is probably highly uncommon. *The return to the venture capitalists also depends on the deal made with the entrepreneurs.


pages: 1,373 words: 300,577

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

"Hurricane Katrina" Superdome, "World Economic Forum" Davos, accelerated depreciation, addicted to oil, Alan Greenspan, Albert Einstein, An Inconvenient Truth, Asian financial crisis, Ayatollah Khomeini, banking crisis, Berlin Wall, bioinformatics, book value, borderless world, BRICs, business climate, California energy crisis, carbon credits, carbon footprint, carbon tax, Carl Icahn, Carmen Reinhart, clean tech, Climategate, Climatic Research Unit, colonial rule, Colonization of Mars, corporate governance, cuban missile crisis, data acquisition, decarbonisation, Deng Xiaoping, Dissolution of the Soviet Union, diversification, diversified portfolio, electricity market, Elon Musk, energy security, energy transition, Exxon Valdez, facts on the ground, Fall of the Berlin Wall, fear of failure, financial innovation, flex fuel, Ford Model T, geopolitical risk, global supply chain, global village, Great Leap Forward, Greenspan put, high net worth, high-speed rail, hydraulic fracturing, income inequality, index fund, informal economy, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), It's morning again in America, James Watt: steam engine, John Deuss, John von Neumann, Kenneth Rogoff, life extension, Long Term Capital Management, Malacca Straits, market design, means of production, megacity, megaproject, Menlo Park, Mikhail Gorbachev, military-industrial complex, Mohammed Bouazizi, mutually assured destruction, new economy, no-fly zone, Norman Macrae, North Sea oil, nuclear winter, off grid, oil rush, oil shale / tar sands, oil shock, oil-for-food scandal, Paul Samuelson, peak oil, Piper Alpha, price mechanism, purchasing power parity, rent-seeking, rising living standards, Robert Metcalfe, Robert Shiller, Robert Solow, rolling blackouts, Ronald Coase, Ronald Reagan, Sand Hill Road, Savings and loan crisis, seminal paper, shareholder value, Shenzhen special economic zone , Silicon Valley, Silicon Valley billionaire, Silicon Valley startup, smart grid, smart meter, South China Sea, sovereign wealth fund, special economic zone, Stuxnet, Suez crisis 1956, technology bubble, the built environment, The Nature of the Firm, the new new thing, trade route, transaction costs, unemployed young men, University of East Anglia, uranium enrichment, vertical integration, William Langewiesche, Yom Kippur War

You get corruption, inflation, Dutch disease, you name it.”4 While these are the general characteristics that define a petro-state, there are wide variations. The dependence on oil and gas of a small Persian Gulf country is obvious, but its population is also small, which reduces pressures. And it can insulate itself from volatile oil prices through the diversified portfolio of its sovereign wealth fund. A large country like Nigeria that depends heavily on oil and natural gas for government revenues and for its GDP has much less flexibility. Spending is very difficult to rein in. There is also a matter of degree. With 139 million people and a highly developed educational system, Russia possesses a large, diversified industrial economy.

These were essentially government bank accounts and investment accounts set up to receive oil and gas revenues that would be kept separate from the national budget. For some countries, they were cast as stabilization funds to be held for “rainy days.” Some funds were explicitly created to prevent inflation and the Dutch disease that can result from a resource boom. These funds transformed oil and gas earnings into diversified portfolios of stocks, bonds, real estate, and direct investment. But with oil prices rising to such heights, they had become truly giant pools of capital, swollen with tens of billions of dollars of unanticipated inflows, and now with tremendous financial capacity that would have far-reaching impact on the global economy.


pages: 500 words: 145,005

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

3Com Palm IPO, Alan Greenspan, Albert Einstein, Alvin Roth, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, behavioural economics, Berlin Wall, Bernie Madoff, Black-Scholes formula, book value, business cycle, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, information asymmetry, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, Kenneth Arrow, Kickstarter, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, low interest rates, market clearing, Mason jar, mental accounting, meta-analysis, money market fund, More Guns, Less Crime, mortgage debt, Myron Scholes, Nash equilibrium, Nate Silver, New Journalism, nudge unit, PalmPilot, Paul Samuelson, payday loans, Ponzi scheme, Post-Keynesian economics, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, risk free rate, Robert Shiller, Robert Solow, Ronald Coase, Silicon Valley, South Sea Bubble, Stanford marshmallow experiment, statistical model, Steve Jobs, sunk-cost fallacy, Supply of New York City Cabdrivers, systematic bias, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Vilfredo Pareto, Walter Mischel, zero-sum game

Individuals file tax returns once a year; similarly, while pensions and endowments make reports to their boards on a regular basis, the annual report is probably the most salient. The implication of our analysis is that the equity premium—or the required rate of return on stocks—is so high because investors look at their portfolios too often. Whenever anyone asks me for investment advice, I tell them to buy a diversified portfolio heavily tilted toward stocks, especially if they are young, and then scrupulously avoid reading anything in the newspaper aside from the sports section. Crossword puzzles are acceptable, but watching cable financial news networks is strictly forbidden.# During our year at Russell Sage, Colin and I would frequently take taxis together.


pages: 462 words: 129,022

People, Power, and Profits: Progressive Capitalism for an Age of Discontent by Joseph E. Stiglitz

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, AlphaGo, antiwork, barriers to entry, basic income, battle of ideas, behavioural economics, Berlin Wall, Bernie Madoff, Bernie Sanders, Big Tech, business cycle, Cambridge Analytica, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, carried interest, central bank independence, clean water, collective bargaining, company town, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, crony capitalism, DeepMind, deglobalization, deindustrialization, disinformation, disintermediation, diversified portfolio, Donald Trump, driverless car, Edward Snowden, Elon Musk, Erik Brynjolfsson, fake news, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, Firefox, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, gig economy, Glass-Steagall Act, global macro, global supply chain, greed is good, green new deal, income inequality, information asymmetry, invisible hand, Isaac Newton, Jean Tirole, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John von Neumann, Joseph Schumpeter, labor-force participation, late fees, low interest rates, low skilled workers, Mark Zuckerberg, market fundamentalism, mass incarceration, meta-analysis, minimum wage unemployment, moral hazard, new economy, New Urbanism, obamacare, opioid epidemic / opioid crisis, patent troll, Paul Samuelson, pension reform, Peter Thiel, postindustrial economy, price discrimination, principal–agent problem, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, Richard Thaler, Robert Bork, Robert Gordon, Robert Mercer, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, search costs, secular stagnation, self-driving car, shareholder value, Shoshana Zuboff, Silicon Valley, Simon Kuznets, South China Sea, sovereign wealth fund, speech recognition, Steve Bannon, Steve Jobs, surveillance capitalism, TED Talk, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, two-sided market, universal basic income, Unsafe at Any Speed, Upton Sinclair, uranium enrichment, War on Poverty, working-age population, Yochai Benkler

What Its Fate Means to You,” Market Watch, June 25, 2018, https://www.marketwatch.com/story/is-the-fiduciary-rule-dead-or-alive-what-its-fate-means-to-you-2018-03-16. 11.The originate-to-distribute system, where mortgage brokers helped banks sell mortgages, which they then sold on to investment banks to be packaged as securities, to be sold on to pension funds and others seeking a diversified portfolio, described in chapter 5. 12.See Laurie Goodman, Alanna McCargo, Edward Golding, Jim Parrott, Sheryl Pardo, Todd M. Hill-Jones, Karan Kaul, Bing Bai, Sarah Strochak, Andrea Reyes, and John Walsh, “Housing Finance at a Glance: A Monthly Chartbook,” Urban Institute, Dec. 2018, available at https://www.urban.org/research/publication/housing-finance-glance-monthly-chartbook-december-2018/view/full_report. 13.The economic modeling is called “hedonic pricing,” ascertaining the value that markets associate with various attributes of a house, including location and various amenities. 14.For instance, the mortgage companies and investment banks often represented rental properties as owner-occupied.


pages: 421 words: 128,094

King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone by David Carey

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, asset allocation, banking crisis, Bear Stearns, Bonfire of the Vanities, business cycle, Carl Icahn, carried interest, collateralized debt obligation, corporate governance, corporate raider, credit crunch, deal flow, diversification, diversified portfolio, financial engineering, fixed income, Future Shock, Gordon Gekko, independent contractor, junk bonds, low interest rates, margin call, Menlo Park, Michael Milken, mortgage debt, new economy, Northern Rock, risk tolerance, Rod Stewart played at Stephen Schwarzman birthday party, Sand Hill Road, Savings and loan crisis, sealed-bid auction, Silicon Valley, sovereign wealth fund, Teledyne, The Predators' Ball, éminence grise

But as the firms had greater and greater amounts of capital at their disposal, they increasingly took on bigger businesses, including public companies like Houdaille and sizable subsidiaries of conglomerates. In their heyday in the 1960s, conglomerates had been the darlings of the stock market, assembling ever more sprawling, diversified portfolios of dissimilar businesses. They lived for growth and growth alone. One of the golden companies of the era, Ling-Temco-Vought, the brainchild of a Texas electrical contractor named Jimmy Ling, eventually amassed an empire that included the Jones & Laughlin steel mills, a fighter jet maker, Braniff International Airlines, and Wilson and Company, which made golf equipment.


pages: 572 words: 134,335

The Making of an Atlantic Ruling Class by Kees Van der Pijl

anti-communist, banking crisis, Berlin Wall, book value, Boycotts of Israel, Bretton Woods, British Empire, business cycle, capital controls, collective bargaining, colonial rule, cuban missile crisis, deindustrialization, deskilling, diversified portfolio, European colonialism, floating exchange rates, full employment, imperial preference, Joseph Schumpeter, liberal capitalism, mass immigration, means of production, military-industrial complex, North Sea oil, plutocrats, profit maximization, RAND corporation, scientific management, strikebreaker, Suez crisis 1956, trade liberalization, trade route, union organizing, uranium enrichment, urban renewal, War on Poverty

In the income brackets between $500,000 and $1 million in the United States, more than half of such income was accounted for by capital gains in 1964; according to Babeau and Strauss-Kahn, ¾ to 4/5 of all property formation in the United States derives from capital gains.4 The issue of dividend payments versus consolidation of profits may pit the smaller rentiers owning a diversified portfolio against the corporate owner-managers more closely interested in the long-term prospects and overall financial position of their company. The owners of big blocks, profiting from tax rates on capital gains varying from 25% in the United States to zero in the Netherlands, are not dependent upon dividends, so conflict with the smaller rentiers has become a familiar phenomenon of annual shareholders’ meetings.


pages: 515 words: 142,354

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

"there is no alternative" (TINA), "World Economic Forum" Davos, Alan Greenspan, bank run, banking crisis, barriers to entry, battle of ideas, behavioural economics, Berlin Wall, Bretton Woods, business cycle, buy and hold, capital controls, carbon tax, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Great Leap Forward, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, low interest rates, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Shiller, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

Shiller, Phishing for Phools: The Economics of Manipulation and Deception (Princeton, NJ: Princeton University Press, 2015). 17 In the United States almost unbounded campaign contributions are made to the individual and the party that comes the closest to leaving the sector unregulated, with significant amounts given to the opposition for good measure. This diversified portfolio approach to campaign giving has worked well for the banks, generating large bailouts under both Democratic and Republic administrations. These investments in America’s political process paid off far better than the financial investments that were supposed to be their expertise, but episodically turned out to be disastrous. 18 See later discussion of Chile’s experience with stripping away virtually all regulations. 19 In December 2014, the US Congress put a provision undoing one of the key parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act regulating banks—a provision intended to ensure that government-insured institutions do not engage in risky trading in derivatives—in a budget bill that the president had to sign to keep the government open. 20 As one example: it would have the right to ban insurance products where the buyer of the insurance has no insurable risk—that is, I cannot buy a life insurance product on someone whose death would have no consequence for me.


pages: 431 words: 132,416

No One Would Listen: A True Financial Thriller by Harry Markopolos

Alan Greenspan, backtesting, barriers to entry, Bernie Madoff, buy and hold, call centre, centralized clearinghouse, correlation coefficient, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, family office, financial engineering, financial thriller, fixed income, forensic accounting, high net worth, index card, Long Term Capital Management, Louis Bachelier, low interest rates, Market Wizards by Jack D. Schwager, offshore financial centre, payment for order flow, Ponzi scheme, price mechanism, proprietary trading, quantitative trading / quantitative finance, regulatory arbitrage, Renaissance Technologies, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, statistical arbitrage, too big to fail, transaction costs, two and twenty, your tax dollars at work

If they can’t give you an immediate answer, then they aren’t even taking the time to measure what is supposed to be their most important function—preserving your capital! My observation is that most fund of funds spend a lot more effort on their marketing than on their due diligence which, of course, doesn’t help their investors very much. A well run HFOF can provide a diversified portfolio and generate attractive returns for their investors. While too many HFOFs got caught up in the Madoff Ponzi scheme, I applaud those organizations that did their homework and helped their investors avoid this disaster. In the United States, almost 11 percent of the HFOFs had Madoff—so 89 percent avoided him.


pages: 598 words: 140,612

Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier by Edward L. Glaeser

affirmative action, Andrei Shleifer, Berlin Wall, Boeing 747, British Empire, Broken windows theory, carbon footprint, carbon tax, Celebration, Florida, classic study, clean water, company town, congestion charging, congestion pricing, Cornelius Vanderbilt, declining real wages, desegregation, different worldview, diversified portfolio, Edward Glaeser, Elisha Otis, endowment effect, European colonialism, Fairchild Semiconductor, financial innovation, Ford Model T, Frank Gehry, global village, Guggenheim Bilbao, haute cuisine, high-speed rail, Home mortgage interest deduction, James Watt: steam engine, Jane Jacobs, job-hopping, John Snow's cholera map, junk bonds, Lewis Mumford, machine readable, Mahatma Gandhi, McMansion, megacity, megaproject, Michael Milken, mortgage debt, mortgage tax deduction, New Urbanism, place-making, Ponzi scheme, Potemkin village, Ralph Waldo Emerson, rent control, RFID, Richard Florida, Rosa Parks, school vouchers, Seaside, Florida, Silicon Valley, Skype, smart cities, Steven Pinker, streetcar suburb, strikebreaker, Thales and the olive presses, the built environment, The Death and Life of Great American Cities, the new new thing, The Wealth of Nations by Adam Smith, trade route, transatlantic slave trade, upwardly mobile, urban planning, urban renewal, urban sprawl, vertical integration, William Shockley: the traitorous eight, Works Progress Administration, young professional

Urban density makes trade possible; it enables markets. The world’s most important market is the labor market, in which one person rents his human capital to people with financial capital. But cities do more than merely allow laborer and capitalist to interact. They provide a wide range of jobs, often thousands of them; a big city is a diversified portfolio of employers. If one employer in a city goes belly-up, there’s another one (or two or ten) to take its place. This mixture of employers may not provide insurance against the global collapse of a great depression, but it sure smooths out the ordinary ups and downs of the marketplace. A one-company town like Hershey, Pennsylvania, depends on a single employer, and workers’ lives depend on whether that employer rises or falls.


pages: 590 words: 153,208

Wealth and Poverty: A New Edition for the Twenty-First Century by George Gilder

accelerated depreciation, affirmative action, Albert Einstein, Bear Stearns, Bernie Madoff, book value, British Empire, business cycle, capital controls, clean tech, cloud computing, collateralized debt obligation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversified portfolio, Donald Trump, equal pay for equal work, floating exchange rates, full employment, gentrification, George Gilder, Gunnar Myrdal, Home mortgage interest deduction, Howard Zinn, income inequality, independent contractor, inverted yield curve, invisible hand, Jane Jacobs, Jeff Bezos, job automation, job-hopping, Joseph Schumpeter, junk bonds, knowledge economy, labor-force participation, longitudinal study, low interest rates, margin call, Mark Zuckerberg, means of production, medical malpractice, Michael Milken, minimum wage unemployment, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, mortgage debt, non-fiction novel, North Sea oil, paradox of thrift, Paul Samuelson, plutocrats, Ponzi scheme, post-industrial society, power law, price stability, Ralph Nader, rent control, Robert Gordon, Robert Solow, Ronald Reagan, San Francisco homelessness, scientific management, Silicon Valley, Simon Kuznets, Skinner box, skunkworks, Solyndra, Steve Jobs, The Wealth of Nations by Adam Smith, Thomas L Friedman, upwardly mobile, urban renewal, volatility arbitrage, War on Poverty, women in the workforce, working poor, working-age population, yield curve, zero-sum game

Even including private debt, there is virtually no evidence that the burden was greater at that point than it was ten or twenty years before. The statistics of growing private debt chiefly reflect not an increase in final claims on income and wealth, but an expansion in the number of intermediary institutions lending to one another, diversifying portfolios, and probably making the system more stable. The problem in the United States and Britain is not debt but waste, not deficit spending but a redistributionist war against wealth that makes everyone poorer—and ironically even promotes inequality. The crucial question on the inflation tax is what is it used for.


A Voyage Long and Strange: On the Trail of Vikings, Conquistadors, Lost Colonists, and Other Adventurers in Early America by Tony Horwitz

airport security, Atahualpa, back-to-the-land, Bartolomé de las Casas, Colonization of Mars, Columbian Exchange, dematerialisation, diversified portfolio, Francisco Pizarro, Hernando de Soto, illegal immigration, joint-stock company, out of africa, Ralph Waldo Emerson, trade route, urban renewal

He went straight to work, fighting Indians in Panama, and quickly won renown as a ruthless warrior: the go-to guy for brutal raids against natives. Contemporaries described him as dark, handsome, hotheaded (apasionado), “hard and dry of word,” and “very busy in hunting Indians.” He was also a shrewd businessman, amassing a diversified portfolio of plundered gold, grants of Indian labor, and stakes in mining and shipping. De Soto sealed his fortune by joining in the conquest of Peru, where Pizarro dispatched him as an emissary to Atahualpa. With characteristic bravura, De Soto rode straight into the Incan camp and reared his foaming steed before the emperor.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, bond market vigilante , book value, borderless world, Bretton Woods, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, capital controls, Carl Icahn, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, disinformation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, Glass-Steagall Act, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, junk bonds, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, long and variable lags, Louis Bachelier, low interest rates, market bubble, Mexican peso crisis / tequila crisis, Michael Milken, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, planned obsolescence, plutocrats, Post-Keynesian economics, price mechanism, price stability, prisoner's dilemma, profit maximization, proprietary trading, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Savings and loan crisis, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, stock buybacks, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

Instead, they have grown increasingly assertive over the last 15 or 20 years, disguising themselves GOVERNANCE behind a rhetoric of democracy, independence, and accountability. Shareholders love to present themselves as the ultimate risk-bearers. But their liabilities are limited by definition to what they paid for the shares, they can always sell their shares in a troubled firm, and if they have diversified portfolios, they can handle an occasional wipeout with hardly a stumble. Employees, and often customers and suppliers, are rarely so well-insulated. Add to this Keynes's argument that the notion of liquidity cannot apply to a community^ as a whole, and you have a very damaging critique of shareholder-centered governance: what's divine for rentiers is bad news for everyone else.


pages: 433 words: 53,078

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

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

One advantage of investing in this way is that you can access a well-spread portfolio of shares and/or other investments with only a small outlay. Many investment funds accept minimum investments as low as £500 as a lump sum or £25 a month in regular savings. If you were to build your own diversified portfolio of shares, you would need holdings in at least M10_LOWE7798_01_SE_C10.indd 307 05/03/2010 09:51 308 Part 3 n Building and managing your wealth ten companies (see p. 297) and dealing charges make purchases under around £1,000 each uneconomic, so you would need to have at least £10,000 to invest.


pages: 490 words: 146,259

New World, Inc. by John Butman

Admiral Zheng, Atahualpa, Bartolomé de las Casas, Blue Ocean Strategy, British Empire, commoditize, Cornelius Vanderbilt, currency manipulation / currency intervention, diversified portfolio, Etonian, Francisco Pizarro, Isaac Newton, joint-stock company, market design, Skype, spice trade, three-masted sailing ship, trade route, wikimedia commons

Eventually, Gilbert assembled a syndicate of some fifty investors that included family members, close friends, and leading merchants.36 John Gilbert, Humphrey’s older brother and overseer of the Gilbert family estate, provided funds and took charge of victualling the venture.37 Also, Adrian Gilbert, the youngest of the Gilbert brothers, invested, as did their half-brothers: Carew Ralegh and his younger brother, Walter. Another notable investor was Thomas “Customer” Smythe, who was vastly experienced as a supporter of overseas enterprises. Like many merchants, he had built a diversified portfolio, investing in the Muscovy Company, the new Spanish Company, and now Gilbert’s colonizing enterprise. As Gilbert went about raising money, organizing a fleet, and recruiting personnel, those outside his inner circle could only guess at his true intentions for the voyage. He assembled an impressive fleet of eleven ships that he “furnished with 500 choice soldiers and sailors” and victualled for a year.38 With such a large contingent of vessels and men, he could confront a Spanish convoy of silver ships or war vessels.


pages: 554 words: 158,687

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, false flag, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, general purpose technology, Glass-Steagall Act, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low interest rates, low skilled workers, M-Pesa, market bubble, means of production, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, post-Fordism, Post-Keynesian economics, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Solow, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

The asymmetry can be partly overcome through aggregation of the holders of loanable capital, or idle money. Institutional investors are essentially agents in securities markets that allow the owners of capital, or of money for loan, to transact on a less asymmetric basis with investment banks. They are able to hold a large and diversified portfolio of securities, against which they could borrow thus expanding their trading options; they could also employ specialists to engage in monitoring counterparties and markets. Institutional investors are qualitatively different from banks in important respects, even though both collect idle funds available for lending.


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, Bear Stearns, Big Tech, bitcoin, blockchain, Bonfire of the Vanities, California gold rush, cashless society, corporate raider, crack epidemic, cryptocurrency, discounted cash flows, disintermediation, diversification, diversified portfolio, do well by doing good, Donald Trump, driverless car, dumpster diving, eat what you kill, fiat currency, financial engineering, fixed income, friendly fire, full employment, Gordon Gekko, greed is good, initial coin offering, interest rate derivative, John Meriwether, junk bonds, Kickstarter, Long Term Capital Management, low interest rates, mandatory minimum, Mary Meeker, Max Levchin, Michael Milken, mobile money, Modern Monetary Theory, mortgage debt, Neil Armstrong, pensions crisis, pets.com, pre–internet, profit motive, proprietary trading, risk tolerance, Saturday Night Live, selling pickaxes during a gold rush, shareholder value, side project, Silicon Valley, Steve Jobs, technology bubble, The Predators' Ball, too big to fail, universal basic income, zero day

So content, in fact, that they have relinquished any desire or ability to influence management teams or hold them accountable. A majority of the investment in publicly traded securities is now done through passive exchange-traded funds (ETFs)—a vehicle invented more than twenty-five years ago in which one can buy a diversified portfolio to get market or sector returns as cheaply as possible. While ETFs may have given the common investor cheap access to public market returns, they have also served to separate them from the companies in which they are invested and therefore the need or ability to assess the management teams.


pages: 558 words: 168,179

Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right by Jane Mayer

Adam Curtis, affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, American Legislative Exchange Council, An Inconvenient Truth, anti-communist, Bakken shale, bank run, battle of ideas, Berlin Wall, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, carried interest, centre right, clean water, Climategate, Climatic Research Unit, collective bargaining, company town, corporate raider, crony capitalism, David Brooks, desegregation, disinformation, diversified portfolio, Donald Trump, energy security, estate planning, Fall of the Berlin Wall, financial engineering, George Gilder, high-speed rail, housing crisis, hydraulic fracturing, income inequality, independent contractor, Intergovernmental Panel on Climate Change (IPCC), invisible hand, job automation, low skilled workers, mandatory minimum, market fundamentalism, mass incarceration, military-industrial complex, Mont Pelerin Society, More Guns, Less Crime, multilevel marketing, Nate Silver, Neil Armstrong, New Journalism, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, oil shock, plutocrats, Powell Memorandum, Ralph Nader, Renaissance Technologies, road to serfdom, Robert Mercer, Ronald Reagan, school choice, school vouchers, Solyndra, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, the scientific method, University of East Anglia, Unsafe at Any Speed, War on Poverty, working poor

Lewis’s Investigative Reporting Workshop spent a year in 2013 culling through the Kochs’ financial records and concluded that their operation was “unprecedented in size, scope, and funding” and also in the way that it was “mutually reinforcing to the direct financial and political interests” of Koch Industries. In 1992, David Koch likened the brothers’ multipronged political strategy to that of venture capitalists with diversified portfolios. “My overall concept is to minimize the role of government and to maximize the role of the private economy and to maximize personal freedoms,” he told the National Journal. “By supporting all of these different [nonprofit] organizations I am trying to support different approaches to achieve those objectives.


pages: 559 words: 169,094

The Unwinding: An Inner History of the New America by George Packer

"World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Apple's 1984 Super Bowl advert, bank run, Bear Stearns, big-box store, citizen journalism, clean tech, collateralized debt obligation, collective bargaining, company town, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, DeepMind, deindustrialization, diversified portfolio, East Village, El Camino Real, electricity market, Elon Musk, Fairchild Semiconductor, family office, financial engineering, financial independence, financial innovation, fixed income, Flash crash, food desert, gentrification, Glass-Steagall Act, global macro, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, high-speed rail, housing crisis, income inequality, independent contractor, informal economy, intentional community, Jane Jacobs, Larry Ellison, life extension, Long Term Capital Management, low skilled workers, Marc Andreessen, margin call, Mark Zuckerberg, market bubble, market fundamentalism, Maui Hawaii, Max Levchin, Menlo Park, military-industrial complex, Neal Stephenson, Neil Kinnock, new economy, New Journalism, obamacare, Occupy movement, off-the-grid, oil shock, PalmPilot, Patri Friedman, paypal mafia, peak oil, Peter Thiel, Ponzi scheme, proprietary trading, public intellectual, Richard Florida, Robert Bork, Ronald Reagan, Ronald Reagan: Tear down this wall, Savings and loan crisis, shareholder value, side project, Silicon Valley, Silicon Valley billionaire, Silicon Valley startup, single-payer health, smart grid, Snow Crash, Steve Jobs, strikebreaker, tech worker, The Death and Life of Great American Cities, the scientific method, too big to fail, union organizing, uptick rule, urban planning, vertical integration, We are the 99%, We wanted flying cars, instead we got 140 characters, white flight, white picket fence, zero-sum game

It argued that overleveraged banks and debt-strapped consumers with unaffordable mortgage payments were creating a credit bubble that would soon pop and create a global financial calamity. Connaughton read the book and tossed it aside. That March, Bear Stearns failed. Connaughton kept an eye on his stocks, where he had most of his wealth in a globally diversified portfolio. The markets were falling, but not precipitously. He expected at most a 10 percent correction. It was never easy to time getting out and back in just right. He stayed put as the Dow dropped toward 10,000. In September, Lehman Brothers went bankrupt, the rest of Wall Street poised to perish with it.


pages: 552 words: 163,292

Boom: Mad Money, Mega Dealers, and the Rise of Contemporary Art by Michael Shnayerson

activist fund / activist shareholder / activist investor, banking crisis, Bonfire of the Vanities, capitalist realism, corporate raider, diversified portfolio, Donald Trump, East Village, estate planning, Etonian, gentrification, high net worth, index card, Jane Jacobs, junk bonds, mass immigration, Michael Milken, NetJets, Peter Thiel, plutocrats, rent control, rolodex, Silicon Valley, tulip mania, unbiased observer, upwardly mobile, vertical integration, Works Progress Administration

Citi and Sotheby’s hoped they would make money, but the art investment department, as it came to be called, wasn’t subject to standard benchmarks. “It wasn’t ‘we’ll get you an eight percent return a year,’” Deitch explained. “It was about understanding art, knowing the context for art that Citi might buy, and keeping that art as a long-term asset, part of an intergenerational, diversified portfolio.” One day in 1980, Deitch joined Citibank to head up the art advisory program he had dreamed into reality. Over the next eight years, he would meet with all the cynosures of the art world: dealers, collectors, art historians, and conservators, evaluating and financing art. In that catbird seat, he would also come to know intimately many of the principal artists in the unfurling narrative of contemporary art, starting with Warhol.


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

Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, book value, 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 engineering, financial innovation, financial intermediation, fixed income, George Akerlof, Glass-Steagall Act, Growth in a Time of Debt, income inequality, information asymmetry, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, junk bonds, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, Money creation, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, Paul Volcker talking about ATMs, peer-to-peer lending, proprietary trading, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Satyajit Das, Savings and loan crisis, shareholder value, sovereign wealth fund, subprime mortgage crisis, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

In the case of equity, in particular, the investors who invest in bank stocks and become shareholders of the bank think about the risk of their investment in bank stocks in the same way they think of the risk of any other stocks or investments they might make. Bank equity investors are often the very same investors as those that invest in other stocks. They are mutual funds investing on behalf of individuals in broad diversified portfolios, or they are other investors that think of the risks and returns of all the various investments they can make. Many of us have some bank stocks as part of our pension fund investments if we diversify our holdings among many investments. The notion that the required ROE is fixed and independent of the funding mix is as fallacious for banks as it is for nonfinancial corporations.


pages: 442 words: 39,064

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

Alan Greenspan, Asian financial crisis, asset allocation, behavioural economics, Berlin Wall, Black Monday: stock market crash in 1987, Bretton Woods, Brownian motion, business cycle, buy and hold, buy the rumour, sell the news, capital asset pricing model, capital controls, continuous double auction, currency peg, Deng Xiaoping, discrete time, diversified portfolio, Elliott wave, Erdős number, experimental economics, financial engineering, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, global village, implied volatility, index fund, information asymmetry, intangible asset, invisible hand, John von Neumann, joint-stock company, law of one price, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, market design, market fundamentalism, mental accounting, moral hazard, Network effects, new economy, oil shock, open economy, pattern recognition, Paul Erdős, Paul Samuelson, power law, quantitative trading / quantitative finance, random walk, risk/return, Ronald Reagan, Schrödinger's Cat, selection bias, short selling, Silicon Valley, South Sea Bubble, statistical model, stochastic process, stocks for the long run, Tacoma Narrows Bridge, technological singularity, The Coming Technological Singularity, The Wealth of Nations by Adam Smith, Tobin tax, total factor productivity, transaction costs, tulip mania, VA Linux, Y2K, yield curve

Third, the resurgence of capital flows also reflected the clear recognition by investors that the economic fundamentals in most emerging markets in the 1990s had vastly improved over those that prevailed in the late 1970s. Since 1987, both the direct barriers, such as capital controls, and the indirect barriers, such as difficulties in evaluating corporate information, that prevented the free flow of capital had gradually been reduced. As capital controls were gradually lifted, global investors with more diversified portfolios began to influence stock prices, particularly in emerging markets [422]. This trend of opening up financial markets meant that firms from emerging markets were able to raise capital, both domestically and internationally, at a lower cost. In fact, firms from emerging markets were able to raise long-term equity and debt capital in global markets at unprecedented rates [422].


pages: 923 words: 163,556

Advanced Stochastic Models, Risk Assessment, and Portfolio Optimization: The Ideal Risk, Uncertainty, and Performance Measures by Frank J. Fabozzi

algorithmic trading, Benoit Mandelbrot, Black Monday: stock market crash in 1987, capital asset pricing model, collateralized debt obligation, correlation coefficient, distributed generation, diversified portfolio, financial engineering, fixed income, global macro, index fund, junk bonds, Louis Bachelier, Myron Scholes, p-value, power law, quantitative trading / quantitative finance, random walk, risk free rate, risk-adjusted returns, short selling, stochastic volatility, subprime mortgage crisis, Thomas Bayes, transaction costs, value at risk

For example, a portfolio manager may bet on a bull stock market and only add those stocks into his portfolio that have high upper tail dependence. So when one stock increases in price, the others in the portfolio are very likely to do so as well, yielding a much higher portfolio return than a well-diversified portfolio or even a portfolio consisting of positively correlated stocks. Tail dependence is a feature that only some multivariate distributions can exhibit as we will see in the following two examples. Tail Dependence of a Gaussian Copula In this illustration, we examine the joint tail behavior of a bivariate distribution function with Gaussian copula.


pages: 614 words: 168,545

Rentier Capitalism: Who Owns the Economy, and Who Pays for It? by Brett Christophers

"World Economic Forum" Davos, accounting loophole / creative accounting, Airbnb, Amazon Web Services, barriers to entry, Big bang: deregulation of the City of London, Big Tech, book value, Boris Johnson, Bretton Woods, Brexit referendum, British Empire, business process, business process outsourcing, Buy land – they’re not making it any more, call centre, Cambridge Analytica, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, cloud computing, collective bargaining, congestion charging, corporate governance, data is not the new oil, David Graeber, DeepMind, deindustrialization, Diane Coyle, digital capitalism, disintermediation, diversification, diversified portfolio, Donald Trump, Downton Abbey, electricity market, Etonian, European colonialism, financial deregulation, financial innovation, financial intermediation, G4S, gig economy, Gini coefficient, Goldman Sachs: Vampire Squid, greed is good, green new deal, haute couture, high net worth, housing crisis, income inequality, independent contractor, intangible asset, Internet of things, Jeff Bezos, Jeremy Corbyn, Joseph Schumpeter, Kickstarter, land bank, land reform, land value tax, light touch regulation, low interest rates, Lyft, manufacturing employment, market clearing, Martin Wolf, means of production, moral hazard, mortgage debt, Network effects, new economy, North Sea oil, offshore financial centre, oil shale / tar sands, oil shock, patent troll, pattern recognition, peak oil, Piper Alpha, post-Fordism, post-war consensus, precariat, price discrimination, price mechanism, profit maximization, proprietary trading, quantitative easing, race to the bottom, remunicipalization, rent control, rent gap, rent-seeking, ride hailing / ride sharing, Right to Buy, risk free rate, Ronald Coase, Rutger Bregman, sharing economy, short selling, Silicon Valley, software patent, subscription business, surveillance capitalism, TaskRabbit, tech bro, The Nature of the Firm, transaction costs, Uber for X, uber lyft, vertical integration, very high income, wage slave, We are all Keynesians now, wealth creators, winner-take-all economy, working-age population, yield curve, you are the product

The chairman of the inquiry remarked: ‘We are particularly concerned by [BAA’s] apparent lack of responsiveness to the differing needs of its airline customers, and hence passengers, and the consequences for the levels, quality, scope, location and timing of investment and levels and quality of service’.25 The third and final consequence of the fact that monopoly conditions have long permeated the UK landscape of infrastructure rentierism is that the landscape has also long been a magnet for financial investment institutions. And it is no wonder. While most such institutions offer bland generalities and buzzwords when describing their investment strategies – well-balanced and diversified portfolios, sustained returns, long-term value growth, and so on – a rogue individual occasionally departs from the party line and explains what it is that really attracts investors. The answer is monopoly – monopoly protected by barriers to entry, and generating, in turn, monopoly prices and profits.


Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-border payments, currency peg, currency risk, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Glass-Steagall Act, Herman Kahn, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Japanese asset price bubble, joint-stock company, junk bonds, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Mary Meeker, Michael Milken, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, Suez canal 1869, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

Many financial institutions are prohibited by the regulatory authorities from holding bonds that are below investment grade, and once this threshold was crossed, these banks and insurance companies were required to sell these bonds; the interest rates on these bonds then increased sharply. The sales pitch was that the buyers of junk bonds – say of a diversified portfolio of these bonds – had a ‘free lunch’ because the additional interest income would be more than enough to cover the losses when one or several of these bonds tanked because the borrowers went bankrupt. The innovation in the 1970s and 1980s was that Drexel Burnham Lambert, then a third-tier investment bank, began to issue junk bonds, known in more polite circles as high yield bonds; the mastermind of this innovation was Michael Milken.


Basic Income: A Radical Proposal for a Free Society and a Sane Economy by Philippe van Parijs, Yannick Vanderborght

Airbnb, Albert Einstein, basic income, Berlin Wall, Bertrand Russell: In Praise of Idleness, carbon tax, centre right, collective bargaining, cryptocurrency, David Graeber, declining real wages, degrowth, diversified portfolio, Edward Snowden, eurozone crisis, Fall of the Berlin Wall, feminist movement, full employment, future of work, George Akerlof, Herbert Marcuse, illegal immigration, income per capita, informal economy, Jeremy Corbyn, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Kickstarter, Marshall McLuhan, means of production, minimum wage unemployment, Money creation, open borders, Paul Samuelson, pension reform, Post-Keynesian economics, precariat, price mechanism, profit motive, purchasing power parity, quantitative easing, race to the bottom, road to serfdom, Robert Solow, Rutger Bregman, Second Machine Age, secular stagnation, selection bias, sharing economy, sovereign wealth fund, systematic bias, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, universal basic income, urban planning, urban renewal, War on Poverty, working poor

Â�After the 2012 elections, the Mongolian government stopped Â�these payments and reinstated the Child Money Program, a quasi-Â�universal child-benefit scheme that had existed prior to 2008, and made it universal. 38. Even in the case of permanent resources (such as land or the broadcast spectrum), it may be wise to create a permanent fund. The resource itself may never get depleted, but its value is likely to fluctuate through time. A fund invested in a sufficiently diversified portfolio would help protect the sustainability of the payment. 39. Cummine (2011: 16–17) suspects that “managerial elitism” may explain this lack of enthusiasm: “Exaggerating the downside of dividends serves as a useful justificatory tool for current SWF [Sovereign Wealth Fund] arrangements where significant national savings stay Â�under the direct and relatively autonomous control of financial manÂ�agÂ�ers.”


pages: 819 words: 181,185

Derivatives Markets by David Goldenberg

Black-Scholes formula, Brownian motion, capital asset pricing model, commodity trading advisor, compound rate of return, conceptual framework, correlation coefficient, Credit Default Swap, discounted cash flows, discrete time, diversification, diversified portfolio, en.wikipedia.org, financial engineering, financial innovation, fudge factor, implied volatility, incomplete markets, interest rate derivative, interest rate swap, law of one price, locking in a profit, London Interbank Offered Rate, Louis Bachelier, margin call, market microstructure, martingale, Myron Scholes, Norbert Wiener, Paul Samuelson, price mechanism, random walk, reserve currency, risk free rate, risk/return, riskless arbitrage, Sharpe ratio, short selling, stochastic process, stochastic volatility, time value of money, transaction costs, volatility smile, Wiener process, yield curve, zero-coupon bond, zero-sum game

Now, looking forward to financial futures in Chapter 7, we will shift the focus away from agricultural commodities like wheat to financial ‘commodities’ like stock indexes and stock index futures contracts as their hedging vehicles. FIGURE 6.1 Long vs. Short Positions 6.1 HEDGING AS PORTFOLIO THEORY You are a mutual fund manager, which means that you manage a diversified portfolio. However, even after diversifying, market volatility remains. You don’t want to jump around between asset classes attempting to execute a risky and questionably profitable market timing strategy. We will call this the Wall Street Journal strategy. Instead, you want to maintain your position in the portfolio, but you also want to protect it against adverse price movements.


pages: 829 words: 187,394

The Price of Time: The Real Story of Interest by Edward Chancellor

"World Economic Forum" Davos, 3D printing, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, asset allocation, asset-backed security, assortative mating, autonomous vehicles, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Bernie Sanders, Big Tech, bitcoin, blockchain, bond market vigilante , bonus culture, book value, Bretton Woods, BRICs, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cashless society, cloud computing, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, commodity super cycle, computer age, coronavirus, corporate governance, COVID-19, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cryptocurrency, currency peg, currency risk, David Graeber, debt deflation, deglobalization, delayed gratification, Deng Xiaoping, Detroit bankruptcy, distributed ledger, diversified portfolio, Dogecoin, Donald Trump, double entry bookkeeping, Elon Musk, equity risk premium, Ethereum, ethereum blockchain, eurozone crisis, everywhere but in the productivity statistics, Extinction Rebellion, fiat currency, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, full employment, gig economy, Gini coefficient, Glass-Steagall Act, global reserve currency, global supply chain, Goodhart's law, Great Leap Forward, green new deal, Greenspan put, high net worth, high-speed rail, housing crisis, Hyman Minsky, implied volatility, income inequality, income per capita, inflation targeting, initial coin offering, intangible asset, Internet of things, inventory management, invisible hand, Japanese asset price bubble, Jean Tirole, Jeff Bezos, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Rogoff, land bank, large denomination, Les Trente Glorieuses, liquidity trap, lockdown, Long Term Capital Management, low interest rates, Lyft, manufacturing employment, margin call, Mark Spitznagel, market bubble, market clearing, market fundamentalism, Martin Wolf, mega-rich, megaproject, meme stock, Michael Milken, Minsky moment, Modern Monetary Theory, Mohammed Bouazizi, Money creation, money market fund, moral hazard, mortgage debt, negative equity, new economy, Northern Rock, offshore financial centre, operational security, Panopticon Jeremy Bentham, Paul Samuelson, payday loans, peer-to-peer lending, pensions crisis, Peter Thiel, Philip Mirowski, plutocrats, Ponzi scheme, price mechanism, price stability, quantitative easing, railway mania, reality distortion field, regulatory arbitrage, rent-seeking, reserve currency, ride hailing / ride sharing, risk free rate, risk tolerance, risk/return, road to serfdom, Robert Gordon, Robinhood: mobile stock trading app, Satoshi Nakamoto, Satyajit Das, Savings and loan crisis, savings glut, Second Machine Age, secular stagnation, self-driving car, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, Stanford marshmallow experiment, Steve Jobs, stock buybacks, subprime mortgage crisis, Suez canal 1869, tech billionaire, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tim Haywood, time value of money, too big to fail, total factor productivity, trickle-down economics, tulip mania, Tyler Cowen, Uber and Lyft, Uber for X, uber lyft, Walter Mischel, WeWork, When a measure becomes a target, yield curve

The decline in MMF assets accelerated after the Fed gave guidance (in March 2009 and August 2011) that the zero interest rate policy would stay in place for a considerable period. The authors claim that zero interest rates drove many money market providers out of business, while some survived by taking on more credit risk and holding less diversified portfolios. 9. Leslie Scism and Anupreeta Das, ‘The Insurance Industry Has Been Turned Upside Down by Catastrophe Bonds’, Wall Street Journal, 8 August 2016. The aggregate amount of catastrophe bonds increased more than threefold between 2008 and 2016, while global catastrophe reinsurance pricing was down by over 40 per cent (since 2006).


pages: 701 words: 199,010

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini

affirmative action, Alan Greenspan, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black-Scholes formula, Bob Litterman, business cycle, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, Glass-Steagall Act, global macro, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, John Meriwether, Kickstarter, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, low skilled workers, managed futures, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, Mitch Kapor, money market fund, moral hazard, mortgage debt, Myron Scholes, National best bid and offer, negative equity, Northern Rock, Occupy movement, oil shock, price stability, proprietary trading, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Ronald Reagan, Sam Peltzman, Savings and loan crisis, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, survivorship bias, systematic trading, tail risk, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

There was no system that gradually transferred company ownership from old employees to new ones, and that reinforced traders’ tendency to put their portfolios above the overall company’s health. LTCM’s risk management framework was a strength and a weakness. Traders were more likely to take on marginal trades because they believed that the diversified portfolio protected them. When we came into 1998, I didn’t like a lot of our trades. They were very marginal. I didn’t do anything about it. I thought with our diversification, it would come out in the wash. There was a general notion that if these trades were standalone trades, we would not have put them on.


pages: 801 words: 209,348

Americana: A 400-Year History of American Capitalism by Bhu Srinivasan

activist fund / activist shareholder / activist investor, American ideology, AOL-Time Warner, Apple II, Apple's 1984 Super Bowl advert, bank run, barriers to entry, Bear Stearns, Benchmark Capital, Berlin Wall, blue-collar work, Bob Noyce, Bonfire of the Vanities, British Empire, business cycle, buy and hold, California gold rush, Carl Icahn, Charles Lindbergh, collective bargaining, commoditize, Cornelius Vanderbilt, corporate raider, cotton gin, cuban missile crisis, Deng Xiaoping, diversification, diversified portfolio, Douglas Engelbart, Fairchild Semiconductor, financial innovation, fixed income, Ford Model T, Ford paid five dollars a day, global supply chain, Gordon Gekko, guns versus butter model, Haight Ashbury, hypertext link, Ida Tarbell, income inequality, information security, invisible hand, James Watt: steam engine, Jane Jacobs, Jeff Bezos, John Markoff, joint-stock company, joint-stock limited liability company, junk bonds, Kickstarter, laissez-faire capitalism, Louis Pasteur, Marc Andreessen, Menlo Park, Michael Milken, military-industrial complex, mortgage debt, mutually assured destruction, Norman Mailer, oil rush, peer-to-peer, pets.com, popular electronics, profit motive, punch-card reader, race to the bottom, refrigerator car, risk/return, Ronald Reagan, Sand Hill Road, self-driving car, shareholder value, side project, Silicon Valley, Silicon Valley startup, Steve Ballmer, Steve Jobs, Steve Wozniak, strikebreaker, Ted Nelson, The Death and Life of Great American Cities, the new new thing, The Predators' Ball, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, trade route, transcontinental railway, traveling salesman, Upton Sinclair, Vannevar Bush, Works Progress Administration, zero-sum game

Not much was ever made of this until Michael Milken arrived on Wall Street. As an undergrad at Berkeley in the 1960s, Milken had come across a study by an economist named Walter Braddock Hickman. In a look at nearly every corporate bond that had existed between 1900 and 1945, Hickman’s research revealed that a diversified portfolio of the lowest-rated bonds, the bonds that seemed to present the most risk, returned substantially more than a portfolio of middle-grade bonds. There were, as is the case now, very few companies at the highest tier of credit known as triple-A, but this middle grade of bonds was the bulk of the corporate bond market.


pages: 669 words: 210,153

Tools of Titans: The Tactics, Routines, and Habits of Billionaires, Icons, and World-Class Performers by Timothy Ferriss

Abraham Maslow, Adam Curtis, Airbnb, Alexander Shulgin, Alvin Toffler, An Inconvenient Truth, artificial general intelligence, asset allocation, Atul Gawande, augmented reality, back-to-the-land, Ben Horowitz, Bernie Madoff, Bertrand Russell: In Praise of Idleness, Beryl Markham, billion-dollar mistake, Black Swan, Blue Bottle Coffee, Blue Ocean Strategy, blue-collar work, book value, Boris Johnson, Buckminster Fuller, business process, Cal Newport, call centre, caloric restriction, caloric restriction, Carl Icahn, Charles Lindbergh, Checklist Manifesto, cognitive bias, cognitive dissonance, Colonization of Mars, Columbine, commoditize, correlation does not imply causation, CRISPR, David Brooks, David Graeber, deal flow, digital rights, diversification, diversified portfolio, do what you love, Donald Trump, effective altruism, Elon Musk, fail fast, fake it until you make it, fault tolerance, fear of failure, Firefox, follow your passion, fulfillment center, future of work, Future Shock, Girl Boss, Google X / Alphabet X, growth hacking, Howard Zinn, Hugh Fearnley-Whittingstall, Jeff Bezos, job satisfaction, Johann Wolfgang von Goethe, John Markoff, Kevin Kelly, Kickstarter, Lao Tzu, lateral thinking, life extension, lifelogging, Mahatma Gandhi, Marc Andreessen, Mark Zuckerberg, Mason jar, Menlo Park, microdosing, Mikhail Gorbachev, MITM: man-in-the-middle, Neal Stephenson, Nelson Mandela, Nicholas Carr, Nick Bostrom, off-the-grid, optical character recognition, PageRank, Paradox of Choice, passive income, pattern recognition, Paul Graham, peer-to-peer, Peter H. Diamandis: Planetary Resources, Peter Singer: altruism, Peter Thiel, phenotype, PIHKAL and TIHKAL, post scarcity, post-work, power law, premature optimization, private spaceflight, QWERTY keyboard, Ralph Waldo Emerson, Ray Kurzweil, recommendation engine, rent-seeking, Richard Feynman, risk tolerance, Ronald Reagan, Salesforce, selection bias, sharing economy, side project, Silicon Valley, skunkworks, Skype, Snapchat, Snow Crash, social graph, software as a service, software is eating the world, stem cell, Stephen Hawking, Steve Jobs, Stewart Brand, superintelligent machines, TED Talk, Tesla Model S, The future is already here, the long tail, The Wisdom of Crowds, Thomas L Friedman, traumatic brain injury, trolley problem, vertical integration, Wall-E, Washington Consensus, We are as Gods, Whole Earth Catalog, Y Combinator, zero-sum game

I’m not going to worry about losing one friend if I have a hundred, but if I have two friends I’m really going to be worried. I’m not going to worry about losing my job because my one boss is going to fire me, because I have thousands of bosses at newspapers everywhere. One of the ways to not worry about stress is to eliminate it. I don’t worry about my stock picks because I have a diversified portfolio. Diversification works in almost every area of your life to reduce your stress.” Dilbert Hardware—What Scott Draws On Wacom Cintiq tablet The Logic of the Double or Triple Threat On “career advice,” Scott has written the following, which is slightly trimmed for space here. This is effectively my mantra, and you’ll see why I bring it up: If you want an average, successful life, it doesn’t take much planning.


Red Rabbit by Tom Clancy, Scott Brick

anti-communist, battle of ideas, disinformation, diversified portfolio, false flag, Ignaz Semmelweis: hand washing, information retrieval, operational security, union organizing, urban renewal

And her husband was glad it was their bed. Comfortable as the New York hotel had been, it is never the same, and besides, he'd had quite enough of his father-in-law, with his Park Avenue duplex and immense sense of self-importance. Okay, Joe Muller had a good ninety million in the bank and his diversified portfolio, and it was growing nicely with the new presidency, but enough was enough. "Day after tomorrow," her husband answered. "I suppose I might go in after lunch, just to look around." "You ought to be asleep by now," she said. There were drawbacks to marrying a physician, Jack occasionally told himself.


Americana by Bhu Srinivasan

activist fund / activist shareholder / activist investor, American ideology, AOL-Time Warner, Apple II, Apple's 1984 Super Bowl advert, bank run, barriers to entry, Bear Stearns, Benchmark Capital, Berlin Wall, blue-collar work, Bob Noyce, Bonfire of the Vanities, British Empire, business cycle, buy and hold, California gold rush, Carl Icahn, Charles Lindbergh, collective bargaining, commoditize, Cornelius Vanderbilt, corporate raider, cotton gin, cuban missile crisis, Deng Xiaoping, diversification, diversified portfolio, Douglas Engelbart, Fairchild Semiconductor, financial innovation, fixed income, Ford Model T, Ford paid five dollars a day, global supply chain, Gordon Gekko, guns versus butter model, Haight Ashbury, hypertext link, Ida Tarbell, income inequality, information security, invisible hand, James Watt: steam engine, Jane Jacobs, Jeff Bezos, John Markoff, joint-stock company, joint-stock limited liability company, junk bonds, Kickstarter, laissez-faire capitalism, Louis Pasteur, Marc Andreessen, Menlo Park, Michael Milken, military-industrial complex, mortgage debt, mutually assured destruction, Norman Mailer, oil rush, peer-to-peer, pets.com, popular electronics, profit motive, punch-card reader, race to the bottom, refrigerator car, risk/return, Ronald Reagan, Sand Hill Road, self-driving car, shareholder value, side project, Silicon Valley, Silicon Valley startup, Steve Ballmer, Steve Jobs, Steve Wozniak, strikebreaker, Ted Nelson, The Death and Life of Great American Cities, the new new thing, The Predators' Ball, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, trade route, transcontinental railway, traveling salesman, Upton Sinclair, Vannevar Bush, Works Progress Administration, zero-sum game

Not much was ever made of this until Michael Milken arrived on Wall Street. As an undergrad at Berkeley in the 1960s, Milken had come across a study by an economist named Walter Braddock Hickman. In a look at nearly every corporate bond that had existed between 1900 and 1945, Hickman’s research revealed that a diversified portfolio of the lowest-rated bonds, the bonds that seemed to present the most risk, returned substantially more than a portfolio of middle-grade bonds. There were, as is the case now, very few companies at the highest tier of credit known as triple-A, but this middle grade of bonds was the bulk of the corporate bond market.


pages: 920 words: 233,102

Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State by Paul Tucker

"Friedman doctrine" OR "shareholder theory", Alan Greenspan, Andrei Shleifer, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, Brexit referendum, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, conceptual framework, corporate governance, diversified portfolio, electricity market, Fall of the Berlin Wall, financial innovation, financial intermediation, financial repression, first-past-the-post, floating exchange rates, forensic accounting, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, Greenspan put, incomplete markets, inflation targeting, information asymmetry, invisible hand, iterative process, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, liberal capitalism, light touch regulation, Long Term Capital Management, low interest rates, means of production, Money creation, money market fund, Mont Pelerin Society, moral hazard, Northern Rock, operational security, Pareto efficiency, Paul Samuelson, price mechanism, price stability, principal–agent problem, profit maximization, public intellectual, quantitative easing, regulatory arbitrage, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, road to serfdom, Robert Bork, Ronald Coase, seigniorage, short selling, Social Responsibility of Business Is to Increase Its Profits, stochastic process, subprime mortgage crisis, tail risk, The Chicago School, The Great Moderation, The Market for Lemons, the payments system, too big to fail, transaction costs, Vilfredo Pareto, Washington Consensus, yield curve, zero-coupon bond, zero-sum game

Here the issues are less about coordination among the authorities, than about whether there are any absolute boundaries and what any permissive constraints might look like. Secured Lending Is Much More Acceptable Than Purchases The first thing to say is that, under our general principles for central bank operations, secured loans (repos) against baskets of diversified portfolios of private sector securities are preferable to outright purchases. Repos avoid important political economy hazards, as they leave the choice to invest in particular instruments in private hands and enable ongoing risk management by the central bank.18 For those reasons, if the usual banking counterparties are unable to participate in repo operations because they are distressed, rather than leap straight to outright purchases, it is preferable for the central bank temporarily to widen the population of intermediaries it will deal with (eligible counterparties).


pages: 788 words: 223,004

Merchants of Truth: The Business of News and the Fight for Facts by Jill Abramson

"World Economic Forum" Davos, 23andMe, 4chan, Affordable Care Act / Obamacare, Alexander Shulgin, Apple's 1984 Super Bowl advert, barriers to entry, Bernie Madoff, Bernie Sanders, Big Tech, Black Lives Matter, Cambridge Analytica, Charles Lindbergh, Charlie Hebdo massacre, Chelsea Manning, citizen journalism, cloud computing, commoditize, content marketing, corporate governance, creative destruction, crowdsourcing, data science, death of newspapers, digital twin, diversified portfolio, Donald Trump, East Village, Edward Snowden, fake news, Ferguson, Missouri, Filter Bubble, future of journalism, glass ceiling, Google Glasses, haute couture, hive mind, income inequality, information asymmetry, invisible hand, Jeff Bezos, Joseph Schumpeter, Khyber Pass, late capitalism, Laura Poitras, Marc Andreessen, Mark Zuckerberg, move fast and break things, Nate Silver, new economy, obamacare, Occupy movement, Paris climate accords, performance metric, Peter Thiel, phenotype, pre–internet, race to the bottom, recommendation engine, Robert Mercer, Ronald Reagan, Saturday Night Live, self-driving car, sentiment analysis, Sheryl Sandberg, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, skunkworks, Snapchat, social contagion, social intelligence, social web, SoftBank, Steve Bannon, Steve Jobs, Steven Levy, tech billionaire, technoutopianism, telemarketer, the scientific method, The Wisdom of Crowds, Tim Cook: Apple, too big to fail, vertical integration, WeWork, WikiLeaks, work culture , Yochai Benkler, you are the product

As the media industry begrudgingly migrated to Facebook while trying to retain some say in its fate, Peretti and his contemporaries conceived of a way to protect their hard-earned audiences from the threat of Facebook’s tweaking its algorithm and wiping them out. The solution was essentially to cultivate a diversified portfolio of Facebook pages, each with a distinct theme and identity, so that the publisher could hedge against the possibility that Facebook would deprioritize its mothership and thereby send its business model into a death spiral. BuzzFeed’s community-specific diversification had begun as a way to corral audiences of particular interests, but it became something of a social experiment in the heterogeneity of the social web.


pages: 1,034 words: 241,773

Enlightenment Now: The Case for Reason, Science, Humanism, and Progress by Steven Pinker

3D printing, Abraham Maslow, access to a mobile phone, affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Albert Einstein, Alfred Russel Wallace, Alignment Problem, An Inconvenient Truth, anti-communist, Anton Chekhov, Arthur Eddington, artificial general intelligence, availability heuristic, Ayatollah Khomeini, basic income, Berlin Wall, Bernie Sanders, biodiversity loss, Black Swan, Bonfire of the Vanities, Brexit referendum, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, carbon tax, Charlie Hebdo massacre, classic study, clean water, clockwork universe, cognitive bias, cognitive dissonance, Columbine, conceptual framework, confounding variable, correlation does not imply causation, creative destruction, CRISPR, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, dark matter, data science, decarbonisation, degrowth, deindustrialization, dematerialisation, demographic transition, Deng Xiaoping, distributed generation, diversified portfolio, Donald Trump, Doomsday Clock, double helix, Eddington experiment, Edward Jenner, effective altruism, Elon Musk, en.wikipedia.org, end world poverty, endogenous growth, energy transition, European colonialism, experimental subject, Exxon Valdez, facts on the ground, fake news, Fall of the Berlin Wall, first-past-the-post, Flynn Effect, food miles, Francis Fukuyama: the end of history, frictionless, frictionless market, Garrett Hardin, germ theory of disease, Gini coefficient, Great Leap Forward, Hacker Conference 1984, Hans Rosling, hedonic treadmill, helicopter parent, Herbert Marcuse, Herman Kahn, Hobbesian trap, humanitarian revolution, Ignaz Semmelweis: hand washing, income inequality, income per capita, Indoor air pollution, Intergovernmental Panel on Climate Change (IPCC), invention of writing, Jaron Lanier, Joan Didion, job automation, Johannes Kepler, John Snow's cholera map, Kevin Kelly, Khan Academy, knowledge economy, l'esprit de l'escalier, Laplace demon, launch on warning, life extension, long peace, longitudinal study, Louis Pasteur, Mahbub ul Haq, Martin Wolf, mass incarceration, meta-analysis, Michael Shellenberger, microaggression, Mikhail Gorbachev, minimum wage unemployment, moral hazard, mutually assured destruction, Naomi Klein, Nate Silver, Nathan Meyer Rothschild: antibiotics, negative emissions, Nelson Mandela, New Journalism, Norman Mailer, nuclear taboo, nuclear winter, obamacare, ocean acidification, Oklahoma City bombing, open economy, opioid epidemic / opioid crisis, paperclip maximiser, Paris climate accords, Paul Graham, peak oil, Peter Singer: altruism, Peter Thiel, post-truth, power law, precautionary principle, precision agriculture, prediction markets, public intellectual, purchasing power parity, radical life extension, Ralph Nader, randomized controlled trial, Ray Kurzweil, rent control, Republic of Letters, Richard Feynman, road to serfdom, Robert Gordon, Rodney Brooks, rolodex, Ronald Reagan, Rory Sutherland, Saturday Night Live, science of happiness, Scientific racism, Second Machine Age, secular stagnation, self-driving car, sharing economy, Silicon Valley, Silicon Valley ideology, Simon Kuznets, Skype, smart grid, Social Justice Warrior, sovereign wealth fund, sparse data, stem cell, Stephen Hawking, Steve Bannon, Steven Pinker, Stewart Brand, Stuxnet, supervolcano, synthetic biology, tech billionaire, technological determinism, technological singularity, Ted Kaczynski, Ted Nordhaus, TED Talk, The Rise and Fall of American Growth, the scientific method, The Signal and the Noise by Nate Silver, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, total factor productivity, Tragedy of the Commons, union organizing, universal basic income, University of East Anglia, Unsafe at Any Speed, Upton Sinclair, uranium enrichment, urban renewal, W. E. B. Du Bois, War on Poverty, We wanted flying cars, instead we got 140 characters, women in the workforce, working poor, World Values Survey, Y2K

The team that brings clean and abundant energy to the world will benefit humanity more than all of history’s saints, heroes, prophets, martyrs, and laureates combined. Breakthroughs in energy may come from startups founded by idealistic inventors, from the skunk works of energy companies, or from the vanity projects of tech billionaires, especially if they have a diversified portfolio of safe bets and crazy moonshots.93 But research and development will also need a boost from governments, because these global public goods are too great a risk with too little reward for private companies. Governments must play a role because, as Brand points out, “infrastructure is one of the things we hire governments to handle, especially energy infrastructure, which requires no end of legislation, bonds, rights of way, regulations, subsidies, research, and public-private contracts with detailed oversight.”94 This includes a regulatory environment that is suited to 21st-century challenges rather than to 1970s-era technophobia and nuclear dread.


pages: 941 words: 237,152

USA's Best Trips by Sara Benson

Albert Einstein, California gold rush, car-free, carbon footprint, cotton gin, Day of the Dead, desegregation, diversified portfolio, Donald Trump, Donner party, East Village, Frank Gehry, gentrification, glass ceiling, Golden Gate Park, Haight Ashbury, haute couture, haute cuisine, if you build it, they will come, indoor plumbing, Kickstarter, lateral thinking, McMansion, mega-rich, New Urbanism, off-the-grid, Ralph Waldo Emerson, rolodex, Ronald Reagan, side project, Silicon Valley, the High Line, transcontinental railway, trickle-down economics, urban renewal, urban sprawl, white flight, white picket fence, Works Progress Administration

It runs a ski shuttle and has a children’s program. 208-622-2001; 1 Sun Valley Rd, Sun Valley; r $150-500 USEFUL WEBSITES www.visitsunvalley.com * * * * * * LINK YOUR TRIP www.lonelyplanet.com/trip-planner TRIP 67 Colorado Ski Country 73 Hot Potatoes & Hot Lava: Offbeat Idaho * * * Return to beginning of chapter TRIP 73 Hot Potatoes & Hot Lava: Offbeat Idaho * * * WHY GO Walk across a lava ocean, don your anti-radiation suit in Atomic City and see the world’s largest potato chip in the planet’s spud capital. When it comes to the offbeat adventure market, Idaho delivers with a hot, diversified portfolio that takes you from the moon to hell. * * * From Craters of the Moon to Hells Canyon (and in-between Bliss), from weapons of mass destruction to massive potato production, Idaho is dialed in with some truly weird attractions. Wedged into the space where the Pacific Northwest’s lush, green curves meet the Rocky Mountain’s craggy glacier-capped peaks, this state boasts more protected acreage (to the tune of 18 million acres of wilderness) than anywhere outside Alaska.


pages: 850 words: 254,117

Basic Economics by Thomas Sowell

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

With the restoration of price stability in the last two decades of the twentieth century, both stocks and bonds had positive rates of real returns.{483} But, during the first decade of the twenty-first century, all that changed, as the New York Times reported: If you invested $100,000 on Jan. 1, 2000, in the Vanguard index fund that tracks the Standard & Poor’s 500, you would have ended up with $89,072 by mid-December of 2009. Adjust that for inflation by putting it in January 2000 dollars and you’re left with $69,114.{484} With a more diversified portfolio and a more complex investment strategy, however, the original $100,000 investment would have grown to $313,747 over the same time period, worth $260,102 in January 2000 dollars, taking inflation into account.{485} Risk is always specific to the time at which a decision is made. “Hindsight is twenty-twenty,” but risk always involves looking forward, not backward.


pages: 1,042 words: 266,547

Security Analysis by Benjamin Graham, David Dodd

activist fund / activist shareholder / activist investor, asset-backed security, backtesting, barriers to entry, Bear Stearns, behavioural economics, book value, business cycle, buy and hold, capital asset pricing model, Carl Icahn, carried interest, collateralized debt obligation, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, diversified portfolio, fear of failure, financial engineering, financial innovation, fixed income, flag carrier, full employment, Greenspan put, index fund, intangible asset, invisible hand, Joseph Schumpeter, junk bonds, land bank, locking in a profit, Long Term Capital Management, low cost airline, low interest rates, Michael Milken, moral hazard, mortgage debt, Myron Scholes, prudent man rule, Right to Buy, risk free rate, risk-adjusted returns, risk/return, secular stagnation, shareholder value, stock buybacks, The Chicago School, the market place, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, two and twenty, zero-coupon bond

They were probably very good examples of what Graham and Dodd most disapproved of in the financial markets. In the ensuing collapse, most of them had no recovery at all. Graham and Dodd had the insight that the difference between the risk-free rate of return and the yields offered by securities of varying risk created investment opportunities, especially if a diversified portfolio could lock in high returns while reducing the overall risk. In almost any kind of investing, returns have at least some (if not a mathematically exact) connection to the risk-free rate of return, with investors demanding higher returns for greater risk. The premium that investors demand for high yield bonds over the safety of Fed Funds offers a good snapshot for the market’s appetite for risk, as seen in this two-decade survey: ARE YOU GETTING PAID TO TAKE RISK?


pages: 1,073 words: 302,361

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

"Friedman doctrine" OR "shareholder theory", "RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Alan Greenspan, asset-backed security, Bear Stearns, Bernie Madoff, Bob Litterman, book value, business cycle, buttonwood tree, buy and hold, collateralized debt obligation, Cornelius Vanderbilt, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, diversified portfolio, do well by doing good, fear of failure, financial engineering, financial innovation, fixed income, Ford paid five dollars a day, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, John Meriwether, junk bonds, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, managed futures, margin call, market bubble, mega-rich, merger arbitrage, Michael Milken, moral hazard, mortgage debt, Myron Scholes, paper trading, passive investing, Paul Samuelson, Ponzi scheme, price stability, profit maximization, proprietary trading, risk tolerance, Ronald Reagan, Saturday Night Live, short squeeze, South Sea Bubble, tail risk, time value of money, too big to fail, traveling salesman, two and twenty, value at risk, work culture , yield curve, Yogi Berra, zero-sum game

In typical Wall Street fashion, Goldman had not made any of these home loans itself. It had no idea who the borrowers were or whether they could repay the mortgages. Goldman knew something about their credit scores but that was about it. It was counting on both the perceived power of the ongoing housing bubble to keep housing values inflated and a diversified portfolio to spread the risk across the pool of geographically diverse mortgages in order to minimize the risk of any one individual borrower or group of borrowers. Of course, Goldman had no intention of keeping the mortgages itself but rather bought them for the sole purpose of packaging them together and selling them off to investors for a fee determined by the difference between the price it paid for them and the price it sold them for.