Don't Count on It! : Reflections on Investment Illusions, Capitalism, ''Mutual'' Funds, Indexing, Entrepreneurship, Idealism, and Heroes PDF
Preview Don't Count on It! : Reflections on Investment Illusions, Capitalism, ''Mutual'' Funds, Indexing, Entrepreneurship, Idealism, and Heroes
Table of Contents Title Page Copyright Page Dedication Foreword Introduction How to Lie with Statistics Torturing the Mutual Fund Data “A Lantern on the Stern” The Wisdom of the Economists An Increasingly Fragile World A Note to the Reader Part One - INVESTMENT ILLUSIONS Chapter 1 - Don’t Count on It! The Perils of Numeracy Peril #1: Attributing Certitude to History Peril #2: The Bias toward Optimism Peril #3: The Worship of Hard Numbers Peril #4: The Adverse Real-World Consequences of Counting An Individual Perspective Chapter 2 - The Relentless Rules of Humble Arithmetic “Trampling with Impunity on Laws Human and Divine” The Mutual Fund Industry Let’s Look at the Record Fund Returns versus Investor Returns Two Costly and Counterproductive Trends Looking Ahead The Wealth of the Nation The Humble Arithmetic of Pension Plans Comparative Advantage versus Community Advantage Our Intermediation Society “The Next Frontier” Appendix Chapter 3 - The Telltale Chart Six Manifestations of RTM RTM—Large-Cap Stocks versus Small-Cap Stocks RTM—Value Stocks versus Growth Stocks RTM in the Market Portfolio RTM in Equity Mutual Funds RTM and “Slice and Dice” RTM and the Stock Market This, Too, Shall Pass Away Chapter 4 - A Question So Important That It Should Be Hard to Think about ... An Industry Changes Lower Equity Returns in Prospect? A Matter of Indifference Chapter 5 - The Uncanny Ability to Recognize the Obvious Indexing as the Ultimate Reality Reality and Illusion in the Stock Market The Real Market versus the Expectations Market “The Battle for the Soul of Capitalism” Wrapping Up Part Two - THE FAILURE OF CAPITALISM Chapter 6 - What Went Wrong in Corporate America? Capitalism—A Brief Review The Broken Circle Creating Wealth—for Management The Failure of the Gatekeepers The Role of the Board Oh, No They Shouldn’t! Actions and Reactions Winners and Losers Fixing the Governance System Fixing the Investment System Back to the Future Man’s Better Nature A Call for Virtue Chapter 7 - Fixing a Broken Financial System An Act of Faith Fathers of the Crisis How Can We Fix Our Broken System? The Heart of the Matter Speculation Sits in the Driver’s Seat Alan Greenspan and the Bubble Bernard Madoff and How We Fool Ourselves President Obama, Leadership, and Confidence Chapter 8 - Vanishing Treasures: Business Values and Investment Values The Battle for the Soul of Capitalism Profession versus Business Business Values and Investment Values Gone Awry The Mutual Fund Industry Loses Its Way Grounds for Hope Chapter 9 - A Crisis of Ethic Proportions Chapter 10 - Black Monday and Black Swans The Light Shined by Frank Knight Mandelbrot on Risk, Ruin, and Reward The Wisdom of John Maynard Keynes Putting Numbers on Keynes’s Distinction Hyman Minsky Adds the Crucial Ingredient The Rise of the Financial Economy The Soaring Costs of Our Financial System The Dominance of Finance over Business Risk and Ruin—A Reprise Looking Ahead Other Risks Chapter 11 - The Go-Go Years Part One: The Supermoney Era Part Two: Retribution Comes Part Three: Another Bubble Part Three - WHAT’S WRONG WITH “MUTUAL” FUNDS Chapter 12 - Re-Mutualizing the Mutual Fund Industry: The Alpha and the Omega The Development of MIT The Wellington Group—From Omega to Alpha Omega to Alpha Enter Vanguard Improved Returns in a Full-Fledged Alpha Complex Alpha versus Omega: Lower Costs and Higher Market Share Tested in the Crucible An Elementary Principle, Too Often Ignored It Is Time for Change How to Get from Omega to Alpha Structure, Strategy, and Spirit Chapter 13 - A New Order of Things: Bringing Mutuality to the “Mutual” Fund A Lone Exception to the Conventional Structure Whence “Mutual”? The Straw That Broke the Camel’s Back The Floodgates Open Vanguard Goes the Other Way Let’s See How It All Worked Out Performance Evaluations from a Higher Authority Costs Rear Their (Ugly) Head Price Competition? Recap of the Issues The Triumph of Conglomeration It’s Time for a Change What’s to Be Done? Two Powerful Endorsements Appendix Chapter 14 - The Fiduciary Principle: No Man Can Serve Two Masters Fiduciary Duty Causes of the Recent Crisis The Role of Institutional Managers The Triumph of Speculation over Investment The Mutual Fund Industry A Piece of History A Prescient SEC? To Build the Financial World Anew Building a Fiduciary Society Chapter 15 - Mutual Funds at the Millennium: Fund Directors and Fund Myths Protecting the Interests of Those Whose Funds They Command Myth #1: Mutual Funds Are Long-Term Investments Myth #2: Mutual Fund Managers Are Long-Term Investors Myth #3: Mutual Fund Shareholders Are Long-Term Owners Myth #4: Mutual Fund Costs Are Declining Myth #5: Mutual Funds Are Meeting the Reasonable Expectations of Investors Where Do We Go from Here? The Ten Commandments The Golden Rule Chapter 16 - “High Standards of Commercial Honor . . . Just and Equitable ... Commercial Honor, Equitable Principles, Fair Dealing The Importance of Investment Income Bond Funds Fund Returns versus Shareholder Returns Measuring Shareholder Satisfaction—The Redemption Rate What’s to Be Done? The “Statement of Policy” A Retrospective View, and a Look Ahead Part Four - WHAT’S RIGHT WITH INDEXING Chapter 17 - Success in Investment Management: What Can We Learn from Indexing? The Theory of Transaction Costs Reality Bites Theory The Merrill Lynch/BARRA Study What Active Managers Can Learn from Indexing The S&P 500 Index Is the S&P Really “The Market”? “Benchmarking” Variations on Long-Term, All-Market Indexing Indexing: Losing Its Way? Chapter 18 - As the Index Fund Moves from Heresy to Dogma, What More Do We Need ... The Intellectual Basis for Indexing Two Schools of Indexing—Quantitative and Pragmatic How Vanguard Came to Start the First Index Mutual Fund Brute Facts More Brute Facts A Case Study What Is the Intellectual Foundation for Active Management? Changing Times and Circumstances A Great Idea Gone Awry What More Do We Need to Know? Conclusion Chapter 19 - “The Chief Cornerstone” The Birth of the Index Fund A Slow Start The Chief Cornerstone The Classic Index Fund The Triumph of Indexing We Are All Indexers Now A New Wave in Indexing Spiders and Sectors The Four E’s How Do Investors Fare? The Chief Cornerstone Remains Chapter 20 - Convergence! The Paradigm of the Original Index Fund Answering the Prayers of a Nobel Laureate The Growth of Indexing Commercial Success, Artistic Success Reverberations
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