prudent man rule

21 results back to index

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

Although UPIA, the model act, is not law, virtually every state has enacted UPIA into law while the remaining handful of states have enacted most of it. At the heart of UPIA is the Prudent Investor Rule, which revised and updated the Prudent Man Rule established in 1830. Under the Prudent Man Rule, trustees were directed to “observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”3 The UPIA makes five fundamental alterations to the Prudent Man Rule, while retaining most of the prudent standards of fiduciary conduct. All changes were derived from the Restatement.

…

Courts are free to take whatever action is appropriate against fiduciaries that breach their duties under ERISA, including their removal.1 Fiduciaries who don’t follow the investment principles as outlined in ERISA may be liable, and if so, may be ordered to personally restore any losses to the plan or to restore any profits made through improper use of plan assets. There were over 2,400 cases filed against ERISA fiduciaries during a 44-month period from January 2005 to August 2008. Almost every case involved a breach a fiduciary duty. Many cases cite violations of the Prudent Man Rule, which points to the possibility of poor investment decision-making by plan trustees.2 In my opinion, the number of ERISA cases litigated each year represents only a small fraction of the fiduciary breaches that actually occur. Unfortunately, most employees who are in poorly managed plans don’t know their rights under ERISA and wouldn’t have the financial resources to bring legal action even if they did know.

…

See Early performance studies Permanent loss Persistence of performance academic studies: bond funds Carhart’s work Fama and French “Hot Hands” study Personal trust(s): fiduciary investing and taxes and Pioneering Portfolio Management (Swensen) Plain vanilla index Policy changes Ponzi scheme Poor accounting Portfolio choices: bottom line and changing the model efficient portfolios fund selection strategies modeling the active bet modifications to model portfolios of active funds quantifying of random portfolio results real-world test relative performance model short-term/long-term Portfolio management: annual evaluation debate on facts about objective of options for Portfolio Selection: Efficient Diversification of Investments (Markowitz) Portfolio theory, modern Positive period weighting Predictors of top performance: fund expenses as qualitative factors as ratings as Pre-inflation return Price-earnings ratio (P/E): growth/value stocks portfolio returns and Price-to-book (P/B) Price-to-cash-flow Price Waterhouse Private trust management: categories of trusts restatement of trusts (third) taxes and UPIA and active management UPIA and passive investing Procrastinating non-index investors: changing/staying the course definition of endowment effect and land of the lost modern portfolio theory and veering off course Prospect theory Prudence, elements of Prudent Investor Act: A Guide to Understanding, The (Simon) Prudent Investor Rule Prudent Man Rule “Purity Hypothesis, The” Qualitative factors, performance and Random walk Random Walk Down Wall Street, A (Malkiel) Rating methods, performance and Real estate Real Estate Investment Trust Act Real Estate Investment Trusts (REITs) Real return Rebalancing portfolio Recovery, market Registered investment advisor (RIA) Reinganum, Marc REITs.

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

As Markowitz put it, “It is necessary to avoid investing in securities with high covariances among themselves.” 5 Markowitz’s ideas, when they finally received the attention they deserved, turned traditional concepts of investment management upside down. Until that point, persons with fiduciary responsibility for managing investments had been guided by the Prudent Man Rule, first formulated by Justice Samuel Putnam of the Commonwealth of Massachusetts in an 1830 ruling. The case involved the estate of a John McLean of Boston, who had died in 1823, leaving a will that provided his wife with the income from a $50,000 trust. Upon the wife’s death, the estate was to be divided equally between Harvard College and Massachusetts General Hospital.

…

Justice Putnam ruled against the plaintiffs, finding that the trustees could not be held responsible for a loss of capital that was not “owing to their willful default,” reasoning, “If that were otherwise, who would undertake such hazardous responsibility?” Putnam then defined what came to be known as the Prudent Man Rule: Do what you will, the capital is at hazard … All that can be required of a trustee to invest, is … to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well the probable safety, of the capital to be invested.6 Putnam’s “rule” guided investment managers for well over a century.

…

The noted economist John Maynard Keynes expressed similar sentiments, writing, “I am in favor of having as large a unit as market conditions will allow … To suppose that safety-first consists in having a small gamble in a large number of different [companies] where I have no information to reach a good judgment, as compared with a substantial stake in a company where one’s information is adequate, strikes me as a travesty of investment policy.”8 Ultimately, the greatest impact of Markowitz’s work was on investment managers in mutual funds, pension funds, and insurance companies, who were acting as fiduciaries for others. By freeing portfolio managers from the Prudent Man Rule, which required that each security purchased in a portfolio be “prudent,” it made possible the rush to stocks by institutional investors that would characterize the second half of the twentieth century. One man who would be instrumental in this process, although for different reasons, was Edward Crosby Johnson II.

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

Amory, which later became the basis for something called the prudent man rule. What the Harvard case and the ensuing prudent man rule established was that if you’re managing a trust, if you’re managing someone else’s money, you had to follow a general industry standard of prudence. You couldn’t decide, say, that your particular client had a higher appetite for risk than the norm and go off and invest your whole trust portfolio in a Mexican gold mine. There were numerous types of investments that one simply could not go near under the prudent man rule, commodity oil futures being a good example of one. The system seemed to work well enough for a long period of time, but by the early nineties there was a new class of economists who had come to believe that the prudent man rule was needlessly restrictive.

…

There were numerous types of investments that one simply could not go near under the prudent man rule, commodity oil futures being a good example of one. The system seemed to work well enough for a long period of time, but by the early nineties there was a new class of economists who had come to believe that the prudent man rule was needlessly restrictive. When I spoke with John Langbein, a Yale professor who helped draft the law that would eventually turn the prudent man rule on its head, he was dismissive, almost to the point of sneering, of the prudent man standard. “It tended to use a sort of … widows and orphans standard,” he said in an irritated voice. I paused. “What do you mean by widows and orphans?” I asked. “Well, what that means is that there was an extreme aversion to loss,” he said.

The Green New Deal: Why the Fossil Fuel Civilization Will Collapse by 2028, and the Bold Economic Plan to Save Life on Earth by Jeremy Rifkin

"World Economic Forum" Davos, 1919 Motor Transport Corps convoy, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, American Society of Civil Engineers: Report Card, autonomous vehicles, Bernie Sanders, Big Tech, bike sharing, blockchain, book value, borderless world, business cycle, business process, carbon footprint, carbon tax, circular economy, collective bargaining, corporate governance, corporate social responsibility, creative destruction, decarbonisation, digital rights, do well by doing good, electricity market, en.wikipedia.org, energy transition, failed state, general purpose technology, ghettoisation, green new deal, Greta Thunberg, high-speed rail, hydrogen economy, impact investing, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invisible hand, it's over 9,000, Joseph Schumpeter, means of production, megacity, megaproject, military-industrial complex, Network effects, new economy, off grid, off-the-grid, oil shale / tar sands, peak oil, planetary scale, prudent man rule, remunicipalization, renewable energy credits, rewilding, Ronald Reagan, shareholder value, sharing economy, Sidewalk Labs, Silicon Valley, Skype, smart cities, smart grid, sovereign wealth fund, Steven Levy, subprime mortgage crisis, the built environment, The Wealth of Nations by Adam Smith, Tim Cook: Apple, trade route, union organizing, urban planning, vertical integration, warehouse automation, women in the workforce, zero-sum game

In 1974, Congress passed and President Gerald Ford signed the Employment Retirement Income Security Act, known as ERISA, which further tightened the ways the funds could be invested, inserting what has become known as the “prudent man rule,” ostensibly intended to protect pension funds from unscrupulous financial advisors. Instead, it ensured that the funds would only be used to advance the interests of the financial community, which would determine the scope and dimensions of what constituted a prudent investment. William Winpisinger, the head of the powerful Machinists Union, spoke for organized labor, suggesting that the “prudent man rule” was merely legalese for seizing control of workers’ deferred wages to advance the interests of the banking community.6 Decisions made in the US Congress back in 1946 on how and who should oversee pension capital would come home to roost in the late 1970s, in ways that will be described in detail below, literally changing the fate of the fourteen northeastern and midwestern states and the lives of millions of working people.

…

CalSTRS is the largest education-only public pension fund in the world, with 950,000 members and beneficiaries, and manages financial assets totaling nearly $224 billion.36 CalPERS is the largest pension fund in the United States, with 1.9 million public employees, retirees, and families, and it oversees financial assets totaling $349 billion.37 Together, these two mega-giants control over $573 billion in assets, or more than half a trillion dollars invested on behalf of almost 3 million public employees, retirees, and their beneficiaries. This law fine-tunes the fiduciary principle that guides public pension fund investments, helping asset managers better appreciate what it means to maximize the financial returns of members. The rather sophomoric understanding of the “prudent man rule” that has guided pension fund trustees for well over seventy years, in which the only criterion is a return on investments, fails to take into consideration how such investments, though they might well appear to be prudent at the moment they are made, could also trigger negative effects on other investments, with a boomerang effect that undermines the long-term maximization of the members’ overall investment portfolio.

…

See also building sector nuclear attacks nuclear energy nuclear energy infrastructure Obama, Barack Ocasio-Cortez, Alexandria oil “Boston Oil Party of 1973” devaluation of international oil companies 1973 OPEC oil embargo oil bubble oil-rich nations projected peak demand for One New York: The Plan for a Strong and Just City One Planet Summit (2018) Organization of the Petroleum Exporting Countries (OPEC) O’Rourke, Beto Oxford Sustainable Finance Programme Pacific Railroad Acts Page, Larry Paris Agreement on Climate Change Paris Climate Summit Party of European Socialists (PES) peak oil demand projections peer assembly governance Pelosi, Nancy pension funds California Public Employees’ Retirement System (CalPERS) California State Teachers’ Retirement System (CalSTRS) and climate change divest/invest campaigns and Employment Retirement Income Security Act (ERISA) implications of fossil fuel sector’s collapse on Ireland Strategic Investment Fund and labor movement Mayor’s Energy Efficiency Fund (London) New York State Common Retirement Fund in Norway pension capital debate (1946) prudent man rule public pensions pushback to fossil fuel divestment and socially responsible investment (SRI) in South Korea and Taft-Hartley Bill in the United States People’s Republic of China Belt and Road Initiative decoupling of electricity sector from fossil fuel industry and geopolitics global sales of electric vehicles infrastructure spending natural gas production and demand nodal buildings renewable energy sector Third Industrial Revolution infrastructure in Thirteenth Five-Year Plan Twelfth Five-Year Plan performance contracting PG&E photovoltaic (PV) energy Pramaggiore, Anne Prentis, Dave presidential campaign of 2012 provider/user networks psychological consciousness Rashid bin Saeed al Maktoum Reagan, Ronald religion Renewable Energy Internet decoupling from fossil fuel industry five foundational pillars of national smart grid Research In Motion Rethinking the Economic Recovery: A Global Green New Deal (UNEP report) RethinkX roadmaps.

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

In 1974, after the collapse of the pension system of one of America’s venerable corporations, the Penn Central Railroad, Congress passed a law regulating pensions, in order to make them safer. In 1979 the Department of Labor, which enforced the law, loosened a provision called the “prudent man rule” so as to allow pension funds to be much less conservative in their investing. The rationale, once again, was protecting the consumer (the retiree, in this case) against having a pension ravaged by inflation. Prudent man rules were ubiquitous, not just in pensions but also in university and foundation endowments, bank trust departments—any institution that was supposed to manage a large pool of capital cautiously, on others’ behalf.

…

Arthur Rock’s venture firm was also the crucial early funder—and Rock was chairman of the board—of the pioneer personal computer company Apple, founded in 1976. Big pools of capital, such as insurance and pension funds and university and foundation endowments, impressed by the spectacular returns produced by Silicon Valley’s successes and newly freed from the investing constraints that the old prudent man rule had imposed on them, began pouring money into venture capital. By the twenty-first century, Silicon Valley venture capital was a small industry with an unofficial headquarters, Sand Hill Road, a strip of low-rise office parks across the street from the Stanford campus, where dozens of firms entertained thousands of pitches from people who wanted to start technology companies.

…

Boone Pincus, Mark; political goals of Pioneers of Finance (video) Pizzo, Tony planned economies Plepler, Andrew pluralism; Bentley on; conception of politics in; critiques of; faux; humility and plutocracy Polanyi, Karl police; conservative empowerment of; racism of Polish Americans politics: economics and; pluralistic conception of; Silicon Valley and; suspicion of; Transaction Man mentality in; violence in; see also community organizing; Congress; federal government; specific administrations; political parties Pontiacs Port Huron Statement (Hayden) positive, as economic term Positive Theory of the Normative Virtues, A (Jensen and Erhard) Power (Berle) predatory lending price setting: by corporations; by government; by unions prime brokerage Prime Reserve Fund Princeton principal-agent problem Priorities USA private equity; GM and; gone public; Morgan Stanley competing with; mortgaged-backed securities and; takeovers by Process of Government, The (Bentley) Procter & Gamble Promise of American Life, The (Croly) prudent man rule public schools Pujo, Arsène Purcell, Philip Putney School, The “Putting Integrity into Finance” (Jensen and Erhard) racism; in housing; in policing railroads; regulation and Ranieri, Lewis Rattner, Steven Reagan, Ronald Reardon, Mike Reed, John regulation: of corporations; of finance; of Internet; post-2008; as Socialist; see also specific agencies Reich, Charles Reich, Robert Republicans: Clinton and; deregulation and; donors and; liberal repurchase market research labs, corporate retirement benefits, see pension funds; Social Security Administration Reuther, Walter Rheem Riesman, David Riggs, Austen Ripley, William Z.

The Power Law: Venture Capital and the Making of the New Future by Sebastian Mallaby

"Susan Fowler" uber, 23andMe, 90 percent rule, Adam Neumann (WeWork), adjacent possible, Airbnb, Apple II, barriers to entry, Ben Horowitz, Benchmark Capital, Big Tech, bike sharing, Black Lives Matter, Blitzscaling, Bob Noyce, book value, business process, charter city, Chuck Templeton: OpenTable:, Clayton Christensen, clean tech, cloud computing, cognitive bias, collapse of Lehman Brothers, Colonization of Mars, computer vision, coronavirus, corporate governance, COVID-19, cryptocurrency, deal flow, Didi Chuxing, digital map, discounted cash flows, disruptive innovation, Donald Trump, Douglas Engelbart, driverless car, Dutch auction, Dynabook, Elon Musk, Fairchild Semiconductor, fake news, family office, financial engineering, future of work, game design, George Gilder, Greyball, guns versus butter model, Hacker Ethic, Henry Singleton, hiring and firing, Hyperloop, income inequality, industrial cluster, intangible asset, iterative process, Jeff Bezos, John Markoff, junk bonds, Kickstarter, knowledge economy, lateral thinking, liberal capitalism, Louis Pasteur, low interest rates, Lyft, Marc Andreessen, Mark Zuckerberg, market bubble, Marshall McLuhan, Mary Meeker, Masayoshi Son, Max Levchin, Metcalfe’s law, Michael Milken, microdosing, military-industrial complex, Mitch Kapor, mortgage debt, move fast and break things, Network effects, oil shock, PalmPilot, pattern recognition, Paul Graham, paypal mafia, Peter Thiel, plant based meat, plutocrats, power law, pre–internet, price mechanism, price stability, proprietary trading, prudent man rule, quantitative easing, radical decentralization, Recombinant DNA, remote working, ride hailing / ride sharing, risk tolerance, risk/return, Robert Metcalfe, ROLM, rolodex, Ronald Coase, Salesforce, Sam Altman, Sand Hill Road, self-driving car, shareholder value, side project, Silicon Valley, Silicon Valley startup, Skype, smart grid, SoftBank, software is eating the world, sovereign wealth fund, Startup school, Steve Jobs, Steve Wozniak, Steven Levy, super pumped, superconnector, survivorship bias, tech worker, Teledyne, the long tail, the new new thing, the strength of weak ties, TikTok, Travis Kalanick, two and twenty, Uber and Lyft, Uber for X, uber lyft, urban decay, UUNET, vertical integration, Vilfredo Pareto, Vision Fund, wealth creators, WeWork, William Shockley: the traitorous eight, Y Combinator, Zenefits

The following year, the government had relaxed its prudent-man rule, opening the way for pension managers to invest in high-risk assets.[43] In 1980, in a scene that might have sprung directly from a conspiratorial Hollywood drama, the venture capitalist Bill Draper sat semi-naked at the secretive power gathering in Bohemian Grove and seized the opportunity to lobby a close Reagan adviser for an additional capital-gains cut; sure enough, the rate was cut again, this time to 20 percent, soon after Reagan took office.[44] The low capital-gains tax and the change to the prudent-man rule rounded out a policy mix that was extraordinarily favorable to venture investors.

…

His new boss, Bob Kirby, quickly dubbed him “Rocket Man.”[11] Valentine’s first challenge was to raise capital for his new fund.[12] A disciple of Ayn Rand, the fiery libertarian novelist, Valentine was not about to incorporate as a Small Business Investment Company and accept government loans.[13] He understood that debt would be a burden to growth-oriented startups, and besides he had been raised to hate it: “My father didn’t believe in debt, so we always rented, and I had it drilled into my mind that debt was evil, limiting, and bad.”[14] Nor would Valentine take money from pension funds, because the Department of Labor’s “prudent-man rule” banned these from investing in risky assets such as venture capital. Casting about for entities that were not constrained by government, Valentine considered raising capital from rich individuals, following the Davis & Rock model. But a friend pointed out that individuals had a habit of dying or divorcing, so that their property had to be divided, which meant that it had to be priced.

…

The founder opened the note, gasped at Swartz’s aggression, and then decided he was right. He kept the letter on his desk, a daily reminder to discipline spending.[12] Accel was founded in 1983, at the height of the surge of capital into venture funds following the cuts in the capital-gains tax and the lifting of the prudent-man rule. With unprecedented sums of money to deploy, the established partnerships hogged the good deals for themselves; gone were the days of the Intel or Apple financings, when lead investors controlled risk by bringing in co-investors. A new venture contender therefore had to earn the opportunity to invest, and one obvious way of appealing to entrepreneurs was to specialize in their technologies.

The Man Behind the Microchip: Robert Noyce and the Invention of Silicon Valley by Leslie Berlin

Apple II, Bob Noyce, book value, business cycle, California energy crisis, Charles Babbage, collective bargaining, computer age, data science, Fairchild Semiconductor, George Gilder, Henry Singleton, informal economy, John Markoff, Kickstarter, laissez-faire capitalism, low skilled workers, means of production, Menlo Park, military-industrial complex, Murray Gell-Mann, open economy, prudent man rule, Richard Feynman, rolling blackouts, ROLM, Ronald Reagan, Sand Hill Road, seminal paper, Silicon Valley, Silicon Valley startup, Steve Jobs, Steve Wozniak, tech worker, Teledyne, Tragedy of the Commons, union organizing, vertical integration, War on Poverty, women in the workforce, Yom Kippur War

Scientific Data Systems had given options: Arthur Rock, interview by author. 36. There are too many millionaires: Art Rock to Frank Roberts, 27 Aug. 1968, IA. 37. Every eligible employee: Noyce to shareholders, 25 April 1969, IA. Options on 64,700 shares: Intel Corporation Balance Sheet, 31 December 1968, IA. 38. Prudent man rule: The “prudent man” rule sharply limited pensions funds’ ability to invest in high-risk ventures. Beginning in 1979, with changes to the Employee Retirement Income Security Act, pension funds were allowed to allocate up to 10 percent of assets in high-risk venture funds. Paul A. Gompers, “The Rise and Fall of Venture Capital,” Business and Economic History, Vol. 23, No. 2, 1992: 1.

…

By the end of 1968, options on 64,700 shares had been granted, and Intel had reserved an additional 25,000 shares for employee purchase.37 Noyce spent a good part of the end of July working with Rock to identify potential investors. Intel was too risky for banks, pension funds, and insurance companies who had to abide by the “prudent man” rule of investing, and so Noyce and Rock targeted individuals. Noyce personally received several unsolicited offers of “financial assistance” equivalent to 166 THE MAN BEHIND THE MICROCHIP hundreds of thousands of dollars, but he, Rock, and Moore decided to limit the investor pool to people they knew well.

…

Many other business groups—including the American Electronics Association (formerly WEMA), which had invited Noyce to testify—had their own reasons for wanting the capital gains tax lowered and vigorously lobbied for a reduction. Their efforts paid off. At the end of 1978, the Carter administration reduced the tax to 28 percent. The lower capital gains tax—coupled with nearly contemporaneous changes easing the “prudent man” rules that had restricted pension funds’ abilities to invest with venture capitalists—had dramatic effects. By one estimate, within 18 months of the changes, the amount of money flowing into professionally managed venture capital companies each year shot from $50 million to nearly $1 billion.14 But the decline of the American semiconductor industry relative to the Japanese did not slow.

The Code: Silicon Valley and the Remaking of America by Margaret O'Mara

A Declaration of the Independence of Cyberspace, accounting loophole / creative accounting, affirmative action, Airbnb, Alan Greenspan, AltaVista, Alvin Toffler, Amazon Web Services, An Inconvenient Truth, AOL-Time Warner, Apple II, Apple's 1984 Super Bowl advert, autonomous vehicles, back-to-the-land, barriers to entry, Ben Horowitz, Berlin Wall, Big Tech, Black Lives Matter, Bob Noyce, Buckminster Fuller, Burning Man, business climate, Byte Shop, California gold rush, Californian Ideology, carried interest, clean tech, clean water, cloud computing, cognitive dissonance, commoditize, company town, Compatible Time-Sharing System, computer age, Computer Lib, continuous integration, cuban missile crisis, Danny Hillis, DARPA: Urban Challenge, deindustrialization, different worldview, digital divide, Do you want to sell sugared water for the rest of your life?, don't be evil, Donald Trump, Doomsday Clock, Douglas Engelbart, driverless car, Dynabook, Edward Snowden, El Camino Real, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Fairchild Semiconductor, Frank Gehry, Future Shock, Gary Kildall, General Magic , George Gilder, gig economy, Googley, Hacker Ethic, Hacker News, high net worth, hockey-stick growth, Hush-A-Phone, immigration reform, income inequality, industrial research laboratory, informal economy, information retrieval, invention of movable type, invisible hand, Isaac Newton, It's morning again in America, Jeff Bezos, Joan Didion, job automation, job-hopping, John Gilmore, John Markoff, John Perry Barlow, Julian Assange, Kitchen Debate, knowledge economy, knowledge worker, Larry Ellison, Laura Poitras, Lyft, Marc Andreessen, Mark Zuckerberg, market bubble, Mary Meeker, mass immigration, means of production, mega-rich, Menlo Park, Mikhail Gorbachev, military-industrial complex, millennium bug, Mitch Kapor, Mother of all demos, move fast and break things, mutually assured destruction, Neil Armstrong, new economy, Norbert Wiener, old-boy network, Palm Treo, pattern recognition, Paul Graham, Paul Terrell, paypal mafia, Peter Thiel, pets.com, pirate software, popular electronics, pre–internet, prudent man rule, Ralph Nader, RAND corporation, Richard Florida, ride hailing / ride sharing, risk tolerance, Robert Metcalfe, ROLM, Ronald Reagan, Salesforce, Sand Hill Road, Second Machine Age, self-driving car, shareholder value, Sheryl Sandberg, side hustle, side project, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, skunkworks, Snapchat, social graph, software is eating the world, Solyndra, speech recognition, Steve Ballmer, Steve Jobs, Steve Wozniak, Steven Levy, Stewart Brand, Strategic Defense Initiative, supercomputer in your pocket, Susan Wojcicki, tacit knowledge, tech billionaire, tech worker, technoutopianism, Ted Nelson, TED Talk, the Cathedral and the Bazaar, the market place, the new new thing, The Soul of a New Machine, There's no reason for any individual to have a computer in his home - Ken Olsen, Thomas L Friedman, Tim Cook: Apple, Timothy McVeigh, transcontinental railway, Twitter Arab Spring, Uber and Lyft, uber lyft, Unsafe at Any Speed, upwardly mobile, Vannevar Bush, War on Poverty, Wargames Reagan, WarGames: Global Thermonuclear War, We wanted flying cars, instead we got 140 characters, Whole Earth Catalog, WikiLeaks, William Shockley: the traitorous eight, work culture , Y Combinator, Y2K

“If we could assure a flow of capital to young companies, then if General Motors in time didn’t do a good job, new companies could compete against it.”11 In the middle of all of this came the Employee Retirement Income Security Act (ERISA) of 1974, which placed strict regulations and performance standards on private pension plans, including a “prudent man rule” that increased fund managers’ personal liability for how they invested retirees’ money. Here was the reason Stew Greenfield had suddenly lost all of his investors. A couple of years after ERISA’s passage, an industry survey found that most trustees had become “unwilling to invest in anything but blue-chip stocks and bonds.”

…

THE BATTLE OF 1978 It was Jimmy Carter who turned the capital gains tax from a boutique issue into a mainstream political debate—and it wasn’t because he sided with the venture capitalists. For all his campaign-trail talk of cutting red tape and promoting small business, Carter did not prove to be the reformer of the VCs’ dreams. For one, his Administration wouldn’t budge on the hated “prudent man” rule. Stew Greenfield had become the NVCA’s point person on that particular issue, and he was gobsmacked by Department of Labor (DOL) diffidence about the rule’s unintended consequences. Tiring of Greenfield’s repeated visits, his government contacts were blunt. “This isn’t what Congress intended,” they acknowledged.

…

High-tech business was now a virtuous, even populist, political actor. They would score no points by appearing to stand in the way of its growth. Then, the following year, another tech-industry ally, Texas Democrat Lloyd Bentsen—“a gem,” declared Stew Greenfield—wrangled the DOL to loosen its interpretation of the “prudent man” rule. The firehose cranked open. Between 1978 and 1980, a staggering $1.5 billion in additional venture investment flowed into the tech world.35 The tech industry looked back on 1978 with the utter conviction that the tax cut was the catalyst for the high-tech boom. The same players continued to lobby an even lower capital gains rate throughout the 1980s.

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

As we’ve already talked about, the five largest US market capitalization companies are all venture backed—Apple, Facebook, Microsoft, Amazon, and Google. Stanford University published a study in 2015 highlighting the concentration of venture-backed companies in the US public markets since 1974. Stanford picked this year because the VC industry dramatically expanded starting in 1979 with the passage of the “prudent man rule.” Prior to 1979, investing in VC was not considered “prudent” for most institutional investors. Thus, the industry largely attracted money from family offices, university endowments, and philanthropic foundations. With the introduction of this rule, pension funds were now permitted to invest in the VC asset class, and thus assets under management grew significantly.

…

., 53–54 mutual funds, 108 Nasdaq index and dot.com boom/bust, 10–11, 15 and median ten-year returns in VC, 30 natural resources, investments in, 58, 63, 64 Netscape, 10, 14 network effects, 128 networking and building relationships, 248 Nicira, 45, 131–132 non-disclosure agreements, 187, 285 non-qualified options (NQOs), 104–105, 185 no-shop provisions, 187–188, 239, 285 notes, convertible, 28–29, 142–147, 148, 233 officers, 183, 206–207 Okta, 128–129, 132, 136 Opsware, 2, 18–19 option pricing model (OPM), 78, 79 Oracle, 51 Otto, 102 pari passu, 157–158, 164 partnerships, 70–71, 92, 93 pass-through entities, 71, 92–94 pension funds, 55 Pinterest, 45 pitching to venture capitalists, 124–139 and discussing learning from failures, 131 and getting an introduction, 124–126 and goals of VCs, 126 on going-to-market, 135–138 on market opportunity, 127–130 and planning for next round of financing, 138–139 on your founder-market fit, 130–133 on your product, 135 on your team, 134 pivoting and adaptability of founders, 49, 135, 137–138 of Butterfield, 137 conflicts resulting from, 213–214 Planck, Max, 49 post-money valuation, 147 power-law curve, 30–31, 31, 36–37, 38, 40 “preferred returns,” 83 preferred stock about, 163 and comparing finance deals, 196–197 and voting, 174, 235 preferred stock/shareholders, 141–142 about, 93, 141–142 and acquisitions, 252 and authorization of new classes of stock, 176 conversion to common shares, 160–165, 177, 235, 280 and corporate actions, 176 and dividends, 155 and drag-along provisions in term sheets, 182 and fiduciary duty of board members, 215–216 and liquidation preference, 157–158, 162–163, 164, 177, 235 and liquidation/recapitalization, 176–177 and protective provisions, 173–177 representation of, on board, 171 and stock restrictions in term sheets, 182 pre-money valuation, 147 price per share, 147–149, 278 price-to-earnings ratio (P/E ratio), 10–11 private equities, 57, 62 “product-first company” concept, 44–45 products and ability to pivot, 49, 135, 137–138 and adaptability of companies, 136–137 adoption of new, 49–50 aspirin/vitamin analogy for, 50 and evaluation of early-stage companies, 48–50 and pitching to venture capitalists, 135 product-market fit, 45, 48, 49 testing of, 49 profits, distribution of, 92–93 pro rata investments, 178–180, 283 prospectuses, 261, 263 protective provisions in term sheets, 173–177, 281–282 “prudent man rule” (1979), 41 public companies, 257–260. See also initial public offerings (IPOs) public equities, 57 pull-up mechanism in recapitalizations, 235 Quattrone, Frank, 12 Rachleff, Andy, 51 raising money from venture capitalists, 112–123 and considering candidacy of companies, 113 and creating incentives for VCs, 114–115 determining the amount, 115–118 and market size, 114–115 and rounds of financing, 115–117, 138–139 and valuation, 118–123 and value of scarce capital, 117–118 real estate investments, 58, 63, 64 recapitalizations about, 233 and employee option pools, 240–241 and fiduciary duty questions, 236 and management incentive plans, 241–242 and ownership structure, 176–177 and pull-up mechanism, 235 purpose of, 234 success following, 239–242 and term sheets, 279, 280, 281, 282 redemption rights, 159, 280 registration rights, 178, 282 Regulation ATS (Alternative Trading System), 107 research & development (R&D), 3, 41 research analysts, 260 reserves set aside by VCs, 66–67 reverse splits of stock holdings, 177, 235–236 Revlon duties, 254–257 Ries, Eric, 45 right-of-first-refusal (ROFR) agreements, 99, 180–181 rights offerings, 238–239 risks inherent in venture capital, 39 road shows for initial public offerings, 263 Sarbanes-Oxley Act (2002), 107 scarcity of capital, value of, 117–118 secondary offering of shares, 267–268 security, 141–142, 278 seed-stage companies, 19, 28 self-dealing, accusations of, 218 seniority, 157–158 shutting down the company, 243–246 signaling, power of positive, 32–33, 35, 37 skill sets, 132 Slack, 137 smoothing model, 61 Southwest Airlines, 46–47 sovereign wealth funds, 55–56 Speck (multiplayer online game), 137 Square, 133 Stanford University, 41 startups, forming, 91–111 and ability to pivot, 137 and accelerated vesting of stocks, 99–101 capital required for, 20, 270–271 choosing a corporate structure, 92–94 and comparable company analyses, 150 and distribution of profits, 92–93 and employee option pools, 103–106 and founder breakups, 94–95 and initial public offerings, 106–109 and intellectual property, 101–103 and nontraditional sources of growth capital, 272 and remaining private, 110–111, 272, 273 and right-of-first-refusal (ROFR) agreements, 99 and shift from post- to pre-IPO appreciation, 272 and stock vesting, 95–97, 110–111 and transfer restrictions, 98–99 state pension funds, 55 stock options about, 104 and acquisitions, 250–251 determining fair market value for, 204–205 and employee departures, 240 incentive stock options (ISOs), 104–105, 185 non-qualified options (NQOs), 104–105, 185 tax treatment of, 185–186 and vesting, 105–106 stocks and accelerated vesting, 99–101, 186–187, 250–251 authorization of new classes of, 176 of former cofounders, 98–101 liquidity of publicly traded, 258–259, 265–266 reverse splits of stock holdings, 177, 235–236 and right-of-first-refusal (ROFR) agreements, 99, 180–181 stock purchase agreement, 284 stock restriction in term sheets, 180–182, 283 and transfer restrictions, 98–99 See also vesting storytelling skills, 134 strategic direction of company, 203–204 Strebulaev, Ilya, 3 success, measuring, 36–40 Swensen, David, 59, 60, 64 Tanium, 46 taxation, 71, 92–93 teams and evaluation of early-stage companies, 43–48 and market size/quality, 51 and pitching to venture capitalists, 130–134 tech bubble.

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

Rule 7: There’s No Escaping Risk When you decide to put your money to work to build long-term wealth, you are not deciding whether or not to take risk, for risk is everywhere. What you must decide is what kind of risk you wish to take. “Do what you will, the capital is at hazard,” just as the Prudent Man Rule assures us. Written by Justice Samuel Putnam of Massachusetts way back in 1830, here’s how he expressed that classic rule: All that can be required of a trustee to invest is that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of the capital to be invested.

…

See Defined benefit (DB) pension plans; Defined contribution (DC) pension plans; Retirement system “People-who-live-in-glass-houses” syndrome PIMCO (Pacific Investment Management Company) Pioneer Fund Politics Portfolio managers, experience and stability of Portfolio turnover: actively managed equity funds exchange traded funds index funds mutual funds Stewardship Quotient and Positive Alpha Press, financial Pricing strategy PRIMECAP Management Company Principals Product, as term Product proliferation, in mutual fund industry Product strategy Profit strategy Proxy statement access by institutional investors, proposed Proxy vote disclosure by mutual funds Prudent Man Rule Public accountants Putnam, Samuel Putnam Management Company Quantitative techniques Random Walk Down Wall Street, A (Malkiel) Rappaport, Alfred Rating agencies Real market Redemptions, shareholder Regulatory issues REIT index fund Retirement accumulation, inadequate Retirement system: about Ambachtsheer, Keith, on asset allocation and investment selection components conflicts of interest costs, excessive current flaws in flexibility, excessive 401(k) retirement plans ideal investor education, lack of longevity risk, failure to deal with mutual funds in New Pension Plan, The pensions, underfunded recommendations retirement accumulation, inadequate savings, inadequacy of “Seven Deadly Sins,” speculation and stock market collapse and value extracted by financial sector Returns: asset allocation and balanced funds defined benefit pension plans projections of equity mutual funds exchange traded funds investment large-cap funds market mutual fund industry speculative Wellington Fund Reversion to the mean (RTM) Riepe, James S.

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

Trillions of dollars of assets are managed by these trustees. After all, being "prudent" is a pretty low standard. It o nly requires your hyperactive broker to be careful when he or she invests your money. The Reporter's Notes to the 1994 Uniform Prudmt Invtstor Act (often referred to as the Prudent Man Rule) sets fo rth the following: [FJ iduciaries and other investors are confronted with potent evidence that the application of expertise, investi· gation and diligence in efforts ro beat the market in these publicly traded securities ordinarily p romises little or no payoff or even a negative payoff after taking account of research and transaction costs. 100 Your Broker or Advisor Is Keeping You Crom Being a Smart Investor Translation: Invesrors should seek market recurns and not engage in stock picking or market timing in an effort (usually fruitless) ro beat the markets.

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

In the early days they left the job to bank trust departments or insurance companies. Then, starting in the 1960s, a new breed of independent money managers began to bid for their business. As middlemen, the pension and endowment chiefs who hired these asset managers tended to focus less on the return end of the operation than on the risk. They followed the 150-year-old “Prudent Man” rule, a legal doctrine that instructed trustees of others’ money to “observe how men of prudence, discretion, and intelligence manage their own affairs” and conduct themselves accordingly.7 This had long been long interpreted to mean that trustees should stick the money in their charge in high-grade bonds and maybe a few blue-chip stocks.

…

See also game theory politics, 20, 269, 319 Ponzi finance, 312–15 portfolio insurance, 150–51, 227–28, 229–31, 236–39 Portfolio Selection, 55 portfolio theory, xiv, 48–52, 55–59, 65, 85, 104, 137, 169 power laws, 133, 134 Prais, Sig, 64, 65 Predictability of Stock Prices (Granger), 192–93 Prediction Company, 304 The Predictors (Bass), 304 price-to-book ratio, 208–9, 224 price-to-earnings (P/E) ratio, 204, 206, 257, 260 Princeton University, 50 Princeton-Newport Partners, 218–19, 220, 242 Principles of Corporate Finance (Brealey and Myers), 355n. 38 Principles of Economics (Marshall), 30, 33, 189, 301 probability, 7–8, 13–15, 50–51, 62, 135, 177 “Proof that Properly Anticipated Prices Fluctuate Randomly” (Samuelson), 73, 144 prospect theory, 184, 186, 191, 291, 298 “Prudent Man” rule, 137 psychology, 176–78, 183–88, 201, 232–33, 266, 293–95. See also behavioral finance Purchasing Agents Association, 24 Putnam Investors, 112 Quantitative Finance, 305 Quarterly Journal of Economics, 63 Rand, Ayn, 91, 258 RAND Corporation, 55, 59, 86 A Random Walk Down Wall Street (Malkiel), 129–30 random walk hypothesis and the business cycle, 26–28 and computing, 99–101 and Cowles, 35–39 and Fama, 96–97 and ideological debate, 29–35 and Malkiel, 129–30 and market uncertainty, 13 modeling, 28–29 and options, 146 and the public consciousness, 99 and Samuelson, 60–66, 67–70, 70–74 and social value of markets, 39–44 Rappaport, Alfred, 164, 271, 280 rational market hypothesis, xiii–xv, 35, 82–83, 107, 179–80, 197, 251, 287–88.

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

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

Walter Bagehot lived in a world where most privately owned banks were partnerships with unlimited liability.With their personal fortunes on the line, prudence was both a virtue and a necessity. Banks made high levels of capital a basis of competition for customer deposits. In the investment world, there is a legal standard, established in an 1830 case (Harvard vs. Amory), called the “prudent man” rule. It essentially sets a standard of care for fiduciaries and agents that they act like any prudent man would handling his own money. This freely admits, as the Massachusetts court put it, that “the capital is always at risk.” There are no sure things in finance.The point is that the prudent man limits his risks as best he can in an uncertain world.

Genentech The Beginnings of Biotech (Synthesis) -University Of Chicago Press (2011) by Sally Smith Hughes

Albert Einstein, Asilomar, Asilomar Conference on Recombinant DNA, barriers to entry, creative destruction, full employment, industrial research laboratory, invention of the wheel, Joseph Schumpeter, mass immigration, Menlo Park, power law, prudent man rule, Recombinant DNA, risk tolerance, Ronald Reagan, Sand Hill Road, Silicon Valley

A rising chorus complained of “outmoded patent laws, restrictive taxes and onerous regulations” stifling American ingenuity and willingness to take investment risks in fields like fiber optics, semiconductors, computers, and biotechnology.8 Policy makers came to recognize that stiff environmental and health and safety regulations hampered technological development and commercial exploitation of basic-science discoveries.9 During the Carter presidency of the late 1970s and continuing full force under Reagan in the 1980s, Congress, in a sweeping change of stance, passed a number of pro-business, protechnology initiatives aimed at stimulating a sagging national economy and fostering international competitiveness. In 1978, in an effort to encourage investment, Congress had cut the tax on long-term capital gains, and a year later relaxed the so-called prudent man rules restricting pension fund investment in high-risk/high-return endeavors. The new legislation prompted investors to move out of tax shelters and into the stock market, where the hunt was on for attractive investment opportunities. In 1980 Congress followed suit with the Stevenson-Wydler Technology Innovation Act and the Bayh-Dole Patent and Trademark Act, both designed to ease and encourage patenting and licensing of the results of federally funded research and in so doing foster technology transfer to the private sector and stimulate U.S. productivity.

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

While most other property and casualty insurers would invest 10 to 15 percent or less of the portfolio in equities, GEICO under Simpson held 35 to 45 percent of the portfolio in equities, and those positions were held in a concentrated manner. This high concentration meant that GEICO’s portfolio looked very little like its competitors’ portfolios. Insurance companies are institutions that must follow the “prudent man” rule—a legal maxim that precludes certain types of investments, and requires due diligence, and diversification. Most insurers interpreted the rule as requiring very broad diversification across portfolio assets. GEICO was unusual in choosing to interpret it as requiring minimal diversification, allowing it to concentrate instead.152 When the rating agencies questioned that practice, Simpson responded, “Well, so far it’s worked pretty well and hopefully it will continue to work well.”153 Though they were somewhat uncomfortable about the proportion of equities in the portfolio, and the concentration of those equities, the ratings agencies were mollified because the operating leverage of the company was so moderate.154 It was not the investment leverage that got GEICO into trouble in the 1970s, but the cost of its float.

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

., payment) to establish a contract did not apply.49 Trustees were thus “economically celibate,” barred from earning a fee for their efforts on behalf of settlors and beneficiaries.50 This, combined with the burdens of full liability and limited investment discretion, helped maintain the “the whole tradition of the trust as a personal relationship,” grounded in moral obligation and voluntarism, as opposed to professional service.51 The processes that would ultimately lead to acknowledgment of trustees as a professional class, and later to the emergence of wealth management as a distinct profession, began in the United States in 1830. The decision of the Massachusetts Supreme Court in the Harvard College v. Amory case established the “prudent man” rule, which gave legal recognition to the expertise of these actors and accorded them a measure of autonomy in investment decisions.52 On the one hand, the rule simply codified the heretofore informal practices of elite solidarity, since “prudence” was defined by the courts in terms of the behavior of “businessmen from the upper circles of Boston society.”53 But the decision also represented a substantive and historical advance in offering recognition of trustees by the state—an essential element in the constitution of all professions.54 The timing and location of this first public acknowledgment of trustees as an emergent professional group was not coincidental: the American Northeast, unlike Great Britain and continental Europe, had no history of large tracts of land being tied up for generations in the hands of hereditary nobility or by plantation farming.

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

In rendering his decision in the case, justice Samuel Putnam concluded that the trustees had conducted themselves "honestly and discreetly and carefully, according to the existing circumstances, in the discharge of their trusts." He declared that trustees cannot be held accountable for a loss of capital that was not "owing to their wilful default.... If that were otherwise, who would undertake such hazardous responsibility?" He continued with what came to be immortalized as the Prudent Man Rule: Do what you will, the capital is at hazard.... All that can be required of a trustee to invest, is, that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.

The End of Work by Jeremy Rifkin

banking crisis, Bertrand Russell: In Praise of Idleness, blue-collar work, cashless society, Charles Babbage, collective bargaining, compensation consultant, computer age, deskilling, Dissolution of the Soviet Union, employer provided health coverage, Erik Brynjolfsson, full employment, future of work, general-purpose programming language, George Gilder, global village, Great Leap Forward, Herbert Marcuse, high-speed rail, hiring and firing, informal economy, interchangeable parts, invention of the telegraph, Jacques de Vaucanson, job automation, John Maynard Keynes: technological unemployment, Kaizen: continuous improvement, karōshi / gwarosa / guolaosi, knowledge economy, knowledge worker, land reform, low interest rates, low skilled workers, means of production, military-industrial complex, new economy, New Urbanism, Paul Samuelson, pink-collar, pneumatic tube, post-Fordism, post-industrial society, Productivity paradox, prudent man rule, Richard Florida, Ronald Reagan, scientific management, Silicon Valley, speech recognition, strikebreaker, technoutopianism, Thorstein Veblen, Toyota Production System, trade route, trickle-down economics, warehouse automation, warehouse robotics, women in the workforce, working poor, working-age population, Works Progress Administration

Consequently, for more than forty years, banks and insurance companies have been investing billions of dollars of workers' funds in new laborsaving technologies, only to eliminate the jobs of the very workers whose money is being used. For a long time, pension-fund managers argued that under the government's "prudent man" rule, their only obligation was to maximize the return on the portfolio. In recent years, partially in response to the prodding of organized labor, the federal government has broadened the concept of the prudent man principle to include investments that promote the overall economic well-being of the recipients.

Troublemakers: Silicon Valley's Coming of Age by Leslie Berlin

AltaVista, Apple II, Arthur D. Levinson, Asilomar, Asilomar Conference on Recombinant DNA, Bear Stearns, beat the dealer, Bill Atkinson, Bill Gates: Altair 8800, Bob Noyce, book value, Byte Shop, Charles Babbage, Clayton Christensen, cloud computing, computer age, Computer Lib, discovery of DNA, Do you want to sell sugared water for the rest of your life?, don't be evil, Donald Knuth, double helix, Douglas Engelbart, Douglas Engelbart, Dynabook, Edward Thorp, El Camino Real, Fairchild Semiconductor, fear of failure, Fellow of the Royal Society, financial independence, game design, Haight Ashbury, hiring and firing, independent contractor, industrial robot, informal economy, Internet of things, inventory management, Ivan Sutherland, John Markoff, Kickstarter, Kitchen Debate, Larry Ellison, Leonard Kleinrock, manufacturing employment, Mark Zuckerberg, Menlo Park, Minecraft, Mother of all demos, Oklahoma City bombing, packet switching, Project Xanadu, prudent man rule, Ralph Nader, Recombinant DNA, Robert Metcalfe, ROLM, rolodex, Ronald Reagan, Salesforce, Sand Hill Road, Silicon Valley, Silicon Valley startup, Snapchat, software as a service, Steve Jobs, Steve Wozniak, Steven Levy, Stewart Brand, Ted Nelson, Teledyne, union organizing, upwardly mobile, William Shockley: the traitorous eight, women in the workforce, work culture

The region now accounted for one out of every five new jobs in the United States.3 High-technology employment in the San Francisco Bay Area grew by 77 percent between 1974 and 1980, and per capita personal income growth in Santa Clara County outpaced that of the rest of California by more than 10 percent.4 With unemployment in the Valley hovering around 4 percent, the classified advertising section of the San Jose Mercury News swelled to ninety-three pages.5 The Wall Street Journal wrote of a “latter day Gold Rush.”6 New industry groups such as the National Venture Capital Association (founded in 1973) and the Semiconductor Industry Association (founded in 1977) sent some of Silicon Valley’s most recognizable entrepreneurs to Washington to testify about the importance of venture capital, microchips, biotechnology, personal computers, and software.II The lobbying efforts paid off. In 1978, Congress slashed the capital gains rate from 49 percent to 28 percent and eased the “prudent man” rules that had restricted pension funds’ abilities to invest with venture capitalists.I Within a year, venture capitalists had more than a half-billion new dollars to invest, and pension funds, universities, and other institutions across the country had begun experimenting with placing small amounts of money with venture capital firms.7 The Wall Street Journal editorial board wrote that a “counter-revolution taking place in American politics” was leaving big business “powerless.”8 California governor Jerry Brown established and chaired a California Commission on Industrial Innovation; members included David Packard, Steve Jobs, and Charlie Sporck of National Semiconductor, as well as the dean of the Stanford business school.9 California’s 1982 budget supported establishment of computer centers and a software clearinghouse, and also set aside $25 million for math, science, and technical education.

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

You always remember your first value investment. 5 The credit crunch triggered by subprime mortgage losses that began in July 2007 is a recent and dramatic example. 6 Graham and Dodd recommended that investors purchase stocks trading for less than two-thirds of “net working capital,” defined as working capital less all other liabilities. Many stocks fit this criterion during the Depression years, far fewer today. 7 Another sort of constraint involves the “prudent man rule,” which is a legal concept that divides permissible from impermissible investments. In the mid- to late 1970s, many interpreted this rule to preclude meaningful exposure to equities. Since then, prudence has become a moving target as investors, gaining comfort over time from the actions of their peers, have come to invest in more exotic and increasingly illiquid asset classes. 8 Great innovations in technology have made vastly more information and analytical capability available to all investors.

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

Grant from its master note program and its later bankruptcy focused attention on the fact that trust account funds invested in a master note—no matter how good the name of the issuer—were exposed to undue credit risk because of the resulting concentration on a single or on several names. Money funds provide trust departments, pension funds, and others running funds for numerous accounts with the convenience of subaccounting plus the comfort of knowing that they are satisfying the prudent man rule for diversification of risk. Thus, money funds replaced master notes in many bank trust departments; they are also widely used by other institutions having similar investment needs. Other Institutional Investors Although money funds were initially designed to offer individual investors a way to invest indirectly in money market securities, they can also be extremely useful to a corporation or other institution running a small short-term portfolio because the small portfolio manager labors under several disadvantages.