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

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