A Decade of Delusions – From Speculative Contagion to the Great Recession

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