Table of Contents
Foreword xi
Preface xvii
Chapter 1 Lead Us Not into Temptation 1
May Reason Prevail 2
Patience and Persistence 6
The Dean of Wall Street Revisited 12
The Investor’s Dilemma 19
It’s a Numbers Game 20
The Supremacy of Earnings 22
“Stealth Compensation” 36
Conclusion 42
Chapter 2 Techno Babble, Techno Bubble 43
A Tale of Two Markets 45
Back to the Future? 53
Warren Buffett on the Stock Market 58
Is the Internet the Answer? 65
What’s a Long-Term Investor to Do? 68
Investment Redefi ned 69
Chapter 3 “Pop!!”.com 75
Risk: No Longer an Afterthought 76
Investment Strategy: Is It Time for Technology? 83
Is There a Snowball Rolling Our Way, Gathering Mass and Speed? 87
The Art/Science of Managing Risk 88
Baby Boomers: Whither Goest Thou? 99
The Internet and IPO Frenzy 100
Fool’s Gold 101
Goliaths Slain 102
Chapter 4 Swimming against the Current 113
Prelude to Our Investment “Strategy” 116
Interest Rates: It Had Better Be Uphill from Here 127
The Power of Popular Delusions 131
The Mind of Crowds 139
Investment Consultants: The Great Middleman Myth 142
Chapter 5 The “Greenspan Put” . . . Again 145
Investment Strategy 146
The Reckoning 149
Sober in the Morning 151
Micro versus Macro 151
The Margin-of-Safety Paradox 153
Waiting Patiently for Those Hanging Curves 154
Chapter 6 Only Fools Rush In 159
The Rogues Gallery, 2003 Vintage 160
Making Progress in the Post-Bubble Environment 164
How Did We Get Here in the First Place? 171
The Apogee of the Mutual-Fund Boom 181
The Great Abdication of Fiduciary Responsibility: The Defined-Contribution Plan 188
Where the Buck Really Stops 192
Chapter 7 Expanding Concern: A Bigger Bubble? 197
Maybe the Markets Are Not Random? 200
A Short History of Financial Euphoria 218
Fully Deluded Earnings: Penance (?) in the Cuff-Links Cooler 222
Run for the Roses: Of Pawns, Guinea Pigs . . . and “Retail Investors” 231
“Swing, You Bum!” 242
Marathon Endurance 247
Chapter 8 What History Teaches 253
Free Markets: Popular Delusions and the Madness of Crowds 254
Aspiring to Rationality by Overcoming Heuristic Biases 257
Today Is Not Tomorrow: Cycles and Differing “Opportunity Sets” 259
Inverting the Traditional High-Risk/High-Return Paradigm 260
The Inevitability of Regression to the Mean 261
There Are No Called Strikes in the Investment Ballgame 263
Focus on the Important 264
The Malevolent Mathematical Mystery of Modern Money Management (a.k.a. MPT) 264
The Absurdity of the Collective Wisdom of Individual Irrationality 265
Diversification and the Myth of Safety in Numbers 266
The New-Era Error 268
Chapter 9 Contagious Speculation 269
The Means to the End 271
The Perfect Storm? Viewing the Vista through the Lens of History 272
The Blossoming of the Financial Economy: The Cataclysm in the Creation of Credit 281
Bubbles Are Indigenous to the Financial Economy 299
If Housing Prices Roll Over 306
A Remarkable Story of Risk Management—Run Amok 310
The Perfect Storm Redux 325
Capitalism: When “Financial”
Overwhelms “Commercial” 329
Minsky: A Prequel? 332
The Evolving History of Economics and Finance: Reflections 334
Chapter 10 The Tipping Point 339
Excerpt from Quarterly Capital Markets Review, July 2007 341
Draft of Letter to MCM Clients, July 2007 342
Quarterly Capital Markets Review, October 2007: “What’s Up, Doc?” 348
Cyclical or Secular? The Current Crisis in the Larger Context of Cause and Effect—Connecting the
Dots through Time 350
The Misalignment of Incentives and the Opaque World of High Finance 352
Edging toward the Precipice 360
The “Simple” Question Why? 362
An Early Epitaph for the First Decade of the New Millennium 363
Credit-Default Swap Alchemy: Transmuting Junk into Gold 371
Counterparty Risk 376
Chapter 11 The End or the Beginning? 381
Origins of a Crisis: Decoupling Risk and Return 384
The Question on Which the Future of Investment Hangs 388
The Stockdale Paradox: What Do Survivors Have in Common? 389
Know Thyself 390
Harsh Realities and the Snowball Effect 394
The Future of Risk Aversion 400
Price Is What You Pay, Value Is What You Get 404
The Lost Decade 407
The Most Powerful Force in the Universe 409
Value Investors: A Rare Breed 411
Risk—Once Again a Four-Letter Word? 413
Analysis and Intuition: The Yin and Yang 416
Epilogue “This Time Is Different” 427
Those Who Don’t Remember History . . . 428
The Insidious Disappearance of Accountability 430
The Intersection of the Philosophical and the Pragmatic 432
Respect for Risk . . . Just for a Fleeting Moment 433
Index 437
