Index

• Page numbers followed by f and t refer to figures and tables, respectively.

A

• Abuse of power, share repurchase as, 300–301
• Active “performance” investing. See also Loser's game of active investing
  • academic research on, 16–20, 120–121, 164
  • added value from, 164, 194
  • alternatives to, 80–81
  • and behavioral economics, 28–30
  • beliefs about, xiv, 35–37
  • defined, 94
  • ETFs and indexing vs., 164–165
  • fees in, 9–10, 30–34, 77–79, 199–201, 273
  • future of, 71, 87
  • historical returns from, 273
  • history of, 5–14, 75–79, 114–116
  • indicators of “progress” in, 93–97
  • by institutional investors, 127–131, 174
  • for institutional investors, 37–38, 45, 75, 96–97, 115, 174
  • investment guidelines on, 273–274
  • justification of, 73–75, 84, 119–125
  • for large funds, 94–97
  • levels of decisions about, 64, 65, 161–162, 197
  • liquidity in, 97
  • manager selection policies for, 146
  • market changes and, 20–28
  • open operations in, 99–105
  • portfolio diversification in, 167–170
  • professional investors and end of, 111–117
  • and profession vs. business of investment management, 77, 84–86
  • rise and fall in popularity of, 73–87
  • self-destruction of, 41–43, 93–97
  • and social acceptance of innovation, 81–84
  • successful investors in, 94–95
  • as zero-sum game, 17, 81, 158

• Added value, 65, 164, 194
• Advertising of funds, 122
• A.G. Becker & Co., 76, 184
• Agent–principal conflict, 135
• Alternative investments, 147, 153–155
• Ambiguity effect, 28
• Amerada Petroleum Corporation, 292, 311
• American Funds, 174
• American Radiator Company, 311
• Analytic models, from other professions, 181–185
• Anti-trust policy, 315–323
  • Bank Merger Act, 319–320
  • Celler and Regulatory Agency Bills, 318–320
  • history of, 316–320
  • Justice Department's enforcement of, 317–323
  • Sherman and Clayton Acts, 316–317

• Appearance and reality, 191–197
  • of beating the market, 194–195
  • Dad's lessons on differentiating, 191–192
  • and investment counseling, 195–197
  • and investment program creation, 66–68
  • and key propositions in investment management, 192–193
  • of manager performance, 193–194

• Armour, Tommy, 37, 39, 44, 65, 173–175
• Assets, fees as percentage of, 30–31, 52, 78, 116, 122–123, 199, 272
• Asset gathering, 54
• Asset growth, 186
• Asset mix:
  • changing, 70
  • counseling clients on, 195–196
  • level of decisions about, 63, 65, 161, 196, 197
  • and long-term success, 192
  • for retirement funds, 249

• Avon Products, 289

B

• Baker Weeks, 200
• Balanced manager paradigm, 219
• Banks, pension management by, 8–9, 75–76, 200, 216
• Bank mergers, 315–323
• Bank Merger Act (1960), 319–321
• Bank of International Settlements, 261
• Barker, Robert, 144
• Base rate fallacy, 28
• Bear markets, 37, 152–153
• Beating the market, 33–34, 36
  • in active investing, 74, 76, 112, 115, 131
  • appearance and reality of, 193–195
  • changing beliefs about, xiv, 20, 22–23
  • defining mission as, 49–53
  • investment guidelines on, 273–274
  • liquidity and, 265–266, 266f
  • in loser's game, 43–44
  • rise of professional investors and, 114, 159

• Becker Securities, 38
• Behavioral economics, 28–30, 68–69
• Beliefs:
  • about active investing, 35–37
  • of investment committee members, 136
  • in investment management field, xiv–xv
  • resistance to changing, xv, 30, 35–36, 163, 245

• Bell System, 239
• Berkeley, George “Bishop,” 121, 236
• Berkshire Hathaway, 169, 174
• Berra, Yogi, 187
• Bismarck, Otto von, 234–235, 245
• Black swan events, 155
• Block transactions, 7, 8, 76, 105, 311
• Blue-chip stocks, 75, 115
• Board of Governors, Federal Reserve, 262, 318n9
• Bonds:
  • capital preservation with, 257–258
  • changing beliefs about, xiv–xv
  • converting, to conservative common stock, 258–259
  • for institutional investors, 144, 251–259
  • investment guidelines on, 275
  • for long-term investors, 251–259, 261–263
  • and Prudent Man Rule, 252–253
  • retirement funds invested in, 249, 261–263
  • and risk of economic depression, 253–255
  • yield on equities vs., 255–257, 262

• Boston Red Sox, 177
• Bower, Marvin, 208
• Broker research, 102–104
• Bronowski, Jacob, 282
• Bubbles, 186–187
• Buffett, Warren, 79, 169, 174, 179, 197, 223, 225, 237, 267, 272, 290
• Bull markets, 41, 115, 239
• Bunker-Ramo Corporation, 304
• Business managers, performance of, 25–26, 208
• Business of investment management:
  • conflict between profession and, 119, 208
  • ordering priorities for, 54–55
  • performance investing and, 77, 84–86
  • performance of, 159–160, 181
  • success in, 213–214

• Business strategy, 209–210

C

• Capital gains, 288, 298
• Capital preservation, 100, 257–258
• Capital productivity, 100
• Capital structure, 308–311
• Cash drag, 158, 266
• Cash flow, stockholder standard for, 307
• Celler, Emmanuel, 318, 320
• Celler Bill, 318–320
• CFA Institute, xv, 282
• Chamberlain, Neville, 235
• Chartered Financial Analyst certification, 21–22, 21f, 50, 99, 113, 282
• Checking accounts, 61–62
• China, 111
• Choice-supportive bias, 28
• Christie, Agatha, 127, 139
• Chrysler Corporation, 302
• Churchill, Winston, 114
• Churchman, C.W., 204
• Clausewitz, Carl von, 222–224
• Clayton Antitrust Act, 317, 318, 320
• Clients, at successful firms, 91, 213
• Coca-Cola, 169
• College savings, 61–62
• Common stock. See also Share repurchases
  • converting bond portfolios to, 258–259
  • intrinsic value of, 284–285
  • reducing outstanding shares of, 311
  • retirement funds invested in, 249
  • speculation in, 286–288
  • yield on bonds vs., 255–257, 262

• Communication, 103, 104, 142–143, 210–211, 226
• Compensation, 124, 212–213
• Competent Stranger thought experiment, 278–279
• Competition:
  • in active/performance investing, 97, 113–114
  • as factor in antitrust decisions, 319–320, 322
  • and following optimal investment policy, 69–71
  • for investment firms, 207
  • manager performance relative to, 158, 159, 175

• Compounding, 247–249, 275–276
• Comptroller of the Currency, 316, 318n9, 322
• “Computer People,” culture of, 203–206
• Computing Tabulating Recording Co., 286–287
• Confirmation bias, 28, 68
• Consolidated Gas of New York, 287
• Consolidation Coal Company, 302
• Cook, James, 183
• Corporate tax cut, 291–293
• Cost analysis, for share repurchase, 309–310
• Creative excellence, 92
• Credit card debt, 248–249
• Culture, 24, 84, 203–206

D

• Darwin, Charles, xv, 1, 2, 73, 81
• Data overload, 210–211
• Debt:
  • credit card, 248–249
  • share repurchase and, 300

• Debt–equity ratio, 308–309, 309t
• Decision making:
  • about innovations, 82
  • big decisions at investment firms, 92, 209–210
  • Warren Buffett on, 169, 267, 272
  • diary of, 271
  • guidelines for, 275
  • by investment committees, 101–102
  • investment history as basis for, 273
  • learning from past, 178–179
  • levels of investor, 63–65, 161–162, 196–197
  • managers' presentation of, 132
  • J.P. Morgan on reasons for, 192
  • pension funds' delegation of, 227–231, 228t, 229t
  • and taking action, 174–175
  • uncertainty in, 95

• Defeatism, share repurchase as, 299
• Defined-benefit pension plans, 57–58, 239, 240, 245–246
• Defined-contribution pension plans, 57, 58, 239–242, 245–246
• Depression, bonds and risk of, 253–255
• Derivatives, 201
• Diary of investment decisions, 271
• Dickens, Charles, 68
• Disney, 169
• Distribution (12-b) fees, 31–32, 79
• Diversification:
  • guidelines on, 271–272
  • with index funds, 16, 17
  • for institutional investors, 58, 134, 146–148, 189
  • for leaders of investment firms, 54–55
  • for long-term investors, 262–263
  • portfolio, 167–170, 189

• Dividend income, 255–257, 302
• DLJ (Donaldson, Lufkin & Jenrette), 200, 281
• Dodd, David, 155
• DOL (US Department of Labor), 239, 246
• Donaldson, Lufkin & Jenrette (DLJ), 200, 281
• Drucker, Peter, 89–92, 143, 160, 209
• Durand, David, 285

E

• Earnings per-share, 301, 305–308
• “Easy action,” 266–267
• Economy, benefits of active investing for, 123–125
• Efficient market hypothesis, 16. See also Market efficiency
• 80/20 Rule, 29–30, 84, 128
• Einstein, Albert, 277
• Emerson, Ralph Waldo, 130
• Emhart Manufacturing Co., 311
• Employee Retirement Income Security Act, see ERISA
• Employer matching, in retirement plan, 247
• Employer stock, 401(k) investments in, 240
• Employment Act (1946), 253–254
• Endowment funds:
  • bond investments for, 251–259
  • investment committees of, 137–138
  • margin of safety for, 68
  • Prudent Man Rule for trustees of, 252, 253

• Endowment model, 153–155
• Enron Corporation, 237, 240
• Equity capital, excess, 295–297, 301–304
• Equity mix, decisions about, 64, 161, 197
• ERISA (Employee Retirement Income Security Act), 228, 239, 246
• Errors:
  • classic mistakes by investors, 274–275
  • conformance to avoid, 185
  • correcting investment professionals', 58–59
  • in defining mission, 49–53
  • diversification to protect against, 169
  • in investment counseling, 55–58
  • by investment professionals, 39, 47–59
  • in ordering of priorities, 53–55

• ETFs, see Exchange-traded funds
• Evolution, theory of, 1, 73, 163, 164
• Exchanges of securities, 311
• Exchange-traded funds (ETFs):
  • as alternative to active investing, 80
  • fees and, 201–202
  • growth of, 15, 15f, 85, 86f
  • in winning strategy, 163–165

• Expansion, 211, 302–303

F

• Fairness, 212–213, 243–244
• Fama, Eugene, 16–17, 19, 32, 81
• Familiarity bias, 132
• Fastow, Andrew, 237
• Fat tails, probability curves with, 155
• FDIC (Federal Deposit Insurance Corporation), 318n9, 319–320
• Federal Reserve, 261–262, 318n9
• Federal Trade Commission, 317
• Fees:
  • in active/performance investing, 9–10, 30–34, 77–79, 199–201, 273
  • appearance vs. reality of, 191, 196–197
  • attracting good clients with high, 91–92
  • changing views of, xiv, 2, 30–34, 189, 199–202
  • defense of, for active investing, 122–123
  • institutional, 200–201
  • and institutional underperformance, 130–131
  • investment guidelines on, 272–273
  • mutual fund, 31, 32t, 67
  • real measurements of, 52, 78–79
  • at successful firms, 209
  • 12b-1, 31–32, 79
  • and value proposition for professional investors, 116

• Ferris, Richard, 18
• Ferry, John, 315–316
• Feynman, Richard, xiii, 316
• Fidelity, 75
• Financial security, in retirement, see Retirement security
• Fisher, Philip, 169
• Followers, 3
• Ford Foundation, 144
• Foreign earnings, corporate tax and, 292
• 401(k) plans:
  • borrowing from, 248–249
  • impact of delaying retirement on, 236
  • investment advice for individuals with, 239–241, 246
  • investment policy for individuals with, 66–67
  • and multimarket multiproduct paradigm, 218

• Fundamental research, 289–290
• Fund executives, underperformance caused by, 135–136

G

• GEICO, 169
• General Fireproofing Company, 311
• General Motors, 8, 183, 216, 298
• Germany, retirement age in, 233–235, 245
• Girard Trust Corn Exchange Bank, 316, 322
• Globalization, 50, 123–124
• Global warming, 163–164
• Goal conflict, 119, 208
• Goldman Sachs, 295
• Governance, by investment committees, 139, 141–146
• Graham, Ben, 6–7, 68, 155, 281–290
• Grand Strategy, 221–226
• Great Depression, 61–62, 93
• Greenwich Associates, xv, 30, 89, 228–229
• Growth, firm, 211
• Growth liabilities, 228

H

• Hanna, Mark, 187
• Harlan, John Marshall, II, 316, 321, 322
• Harrison, John, 183
• Harvard Business School, xiii–xv, 269, 291, 315
• Hedge funds, 13–14, 13f, 50
• Heterophilous social systems, 4n5
• Hinton, Longstreet, 183
• Homophilous social systems, 4n5

I

• IBM, 287
• Illusion of skill, 24–26
• Illusion of validity, 130
• Incentives, for open operations, 105
• Income, dividend, 255–257, 302
• Income received, fees as percentage of, 9
• Incremental returns, fees as percentage of, xiv, 31–32, 52, 79, 116, 123, 200, 201, 273
• Indexing and index funds:
  • academic evidence supporting, 16–20, 120–121
  • as alternative to active investing, 80, 81
  • and behavioral economics, 28–30
  • changing beliefs about, xiv, 4–5
  • costs of active management vs., 78–79
  • fees and, 30–34, 131, 202
  • growth of, 14–15, 83–85, 86f, 115–117
  • historical returns from, 273
  • for institutional investors, 151, 230
  • investment guidelines on, 272
  • investor decisions about, 64, 161, 197
  • loser's game of active management vs., 43–44
  • market changes favoring, 20–28
  • in winning strategy, 163–165

• Index Participation Shares, 15n27
• Index replication, by active managers, 121–122, 168, 189
• Indian Head Mills, 308
• Individual investors. See also Long-term investors; Professional investors
  • as amateurs, 158–159, 194
  • bond investments for, 261–263
  • classic mistakes of, 274–275
  • liquidity for, 265–267
  • successful, 94–95
  • views on fees of, 199–202

• Individual retirement accounts (IRAs), 236
• Industrial corporations, share repurchase for, 295–296, 313
• Inflation, 254, 261–262
• Influentials, 2–3, 164
• Information:
  • access to/distribution of, 50, 74, 111, 113, 188, 207
  • Ben Graham on need for, 283–284
  • in open operations, 102–103
  • for performance investors, 94

• Informationless trading, 159, 194
• Innovation:
  • dynamics of, 2–5, 82f, 164
  • in portfolio management, 89–92
  • social acceptance of, 81–84

• Innovators, 2–3, 164
• Insight on investment:
  • from Tommy Armour, 173–175
  • and developing your own plan, 171–172
  • from Peter Drucker, 89–92
  • for future generations, 269–276
  • from Ben Graham, 281–290
  • from Joseph K. Klingenstein, 109–110
  • from Munich Marathon, 107–109
  • at successful firms, 213
  • from Ted Williams, 177–180

• Institutional fees, 200–201
• Institutional investors. See also Endowment funds; Pension funds
  • active investing for, 37–38, 45, 75, 96–97, 115, 174
  • bonds for, 144, 251–259
  • dependency in decision making by, 3n4
  • indexing by, 230
  • investment committees of (see Investment committees)
  • manager hiring/firing by, 129–130, 129f
  • market influence of, 41–42, 201
  • performance expectations of, 27, 80, 80f, 128
  • trading volume for, 113–114, 194

• Institutional underperformance, 127–139, 141–142
  • evidence of, 128–131
  • fund executives as cause of, 135–136
  • investment committees as cause of, 136–139
  • investment consultants as cause of, 133–135
  • investment managers as cause of, 132–133
  • taking responsibility for, 139

• Insurance companies, 8–9, 75
• Intergenerational equity, 152
• International investments, xiv, 112–113, 112t, 150
• Intrinsic value, 284–286
• Investments. See also specific types
  • performance of, as symptom of problem, 185–187
  • selection of specific, 179–180
  • time period for measuring performance of, 184–186
  • turnover in, 224–225, 272

• Investment committees, 141–155
  • endowment model for, 153–155
  • in history of performance investing, 75
  • institutional underperformance caused by, 136–139
  • investing consultants and, 134–135
  • investment objectives of, 144–146
  • manager selection by, 51–52
  • mission of, 143–144
  • open operations vs. decisions from, 100–102
  • self-evaluation by, 146–151
  • spending rule for, 151–153
  • structure of, 142–143

• Investment consultants:
  • on alternative investments, 154
  • committees' over-reliance on, 148–149
  • institutional underperformance caused by, 133–135
  • manager selection by, 10–11, 18–19, 133–135
  • in specialist manager paradigm, 217

• Investment counseling:
  • and appearance vs. reality of investment management, 195–197
  • history of, 9
  • on investment policy selection, 70–71
  • and levels of investor decisions, 160–161
  • moving away from, 48–49, 52–53, 55–58
  • returning to, 189–190

• Investment firms:
  • big decisions at, 209–210
  • communication at, 210–211
  • compensation at, 212–213
  • defining success for, 213–214
  • good ideas and clients at, 213
  • Grand Strategy for, 221–226
  • growth and expansion for, 211
  • in history of active investing, 76–77
  • laws to improve performance of, 90–92
  • professional and business goals of, 208
  • professional development at, 210
  • service-centric strategies of, 58–59
  • strategic considerations for, 209
  • structure of, 90, 212
  • successful, 207–214
  • turnover at, 212

• Investment guidelines, 269–276
  • on active management, 273–274
  • and classic mistakes of investors, 274–275
  • on diversification, 271–272
  • on fees, 272–273
  • on financial decision-making, 275
  • on indexing, 272
  • investment history, decisions based on, 273
  • on investment programs, 274
  • on long-term investing, 271
  • on saving, 275
  • stock prices, view of, 272
  • on trading frequency, 272

• Investment horizon, 263. See also Long-term investors
• Investment management field. See also Business of investment management; Profession of investment management
  • and analytic models for other professions, 181–185
  • appearance vs. reality in, 191–197
  • behavioral economics and, 28–30
  • changes in, xiv–xv, 1–34, 158
  • cultures of Computer vs. Investment People in, 203–206
  • and dynamics of innovation, 2–5
  • early performance investing in, 5–14
  • employment in, xiii–xiv
  • fees in, 30–34
  • growth of index funds in, 14–15
  • investment performance as symptom in, 185–187
  • key propositions in, 192–193
  • levels of, 157–162
  • market changes and, 20–28
  • modern capital theory in, 229–231
  • multimarket multiproduct paradigm in, 215–220
  • predicted future shortfalls in, 188–189
  • research on active vs. passive investing, 16–20
  • return to investment counseling in, 189–190
  • signs of serious problems in, 181–190
  • traditional vs. open operations in, 100–101

• Investment managers (generally):
  • changing, 70, 83, 129–130, 137
  • firm tenure for, 212
  • in history of active investing, 8–9, 76–77
  • identifying first-rate, xiv, xv, 18–19, 27
  • justification of active investing by, 73–75, 84, 119–125
  • number of, for institutional investors, 146–149
  • open operations by, 99–105
  • pension fund policy decisions by, 227–231, 228t, 229t
  • specialization for, 215–218

• Investment manager performance:
  • for active managers, 22–28, 33–35, 75, 77–79
  • appearance vs. reality of, 193–194
  • enhanced reporting of, 121
  • expectations of, 80, 80f
  • fees and, 201
  • hiring/firing decisions based on, 129–130, 129f
  • institutional underperformance and, 132–133
  • measures of, 167–168
  • volatility and, 128

• Investment manager selection:
  • for active investing, 79
  • informal system of, 5
  • by investment consultants, 10–11, 18–19, 133–135
  • level of decisions about, 64, 161
  • past performance as basis for, 51–52
  • policies on, 145–146, 149

• Investment objectives, 63, 67–68, 108–109, 144–146
• Investment philosophy drift, 187
• Investment policy:
  • committee's responsibilities for, 144, 145, 151
  • creating, for clients, 63, 69–71
  • pension funds' decisions about, 227–231
  • staying committed to, 44, 160–161, 196
  • thought experiment on setting, 277–279

• Investment professionals. See also specific types
  • culture of Computer People, 203–206
  • errors made by, 47–59
  • guidance from, for retirement security, 237–242
  • investment counseling by, 55–58
  • mission of, 49–53
  • values of, 48, 53–55

• Investment program(s):
  • competition and use of, 69–71
  • designing customized, 56–57, 61–71
  • developing your own, 171–172
  • and future of active management, 71
  • guidelines on, 274
  • helping clients design, 56–57
  • investors' self-knowledge in, 68–69
  • levels of investor decisions in, 63–65
  • market as distraction from, 66, 272
  • realities to integrate in, 66–68
  • winning triangle in, 63

• Investor decisions, levels of, 63–65, 161–162, 196–197
• IRAs (individual retirement accounts), 236

J

• Jensen, Michael, 16
• Johnson, Edwin C., 6
• Justice, 243–244
• Justice Department, 316, 317–323

K

• Kahneman, Daniel, 24–26, 29, 84
• Kelly, Walt, 70
• Kennedy, John F., and administration, 291–293
• Keynes. J. M., 5, 6
• Klingenstein, Joseph K., 109–110
• Kuhn, Thomas, 2, 4, 81, 83, 163

L

• Large-cap funds, 17, 75, 94–97
• Large-capitalization stocks, 74–75, 95–96, 117, 158
• Law of small numbers, 114
• Lay, Kenneth, 237
• Leaders of investment firms, 54–55, 221–226
• Learning, xv–xvi, 269–270
• Leverage, 275
• Lifecycle, of performance investing, 73–87, 95–96, 115–116
• Life-cycle funds, 58
• Life expectancy, 233–236, 247
• Ling-Temco-Vought, Inc., 311
• Liquidation, 299–300
• Liquidity, 96, 97, 145, 265–267
• Load funds, 32n55
• Lodge, Henry Cabot, 225
• Lombardi, Vincent, 40
• Long-Term Capital Management, 155
• Long-term investors, 69
  • bonds for, 251–259, 261–263
  • endowment model for, 155
  • guidelines for, 269–276
  • performance investors vs., 94
  • thought experiment on policy-setting for, 277–279
  • in traditional investment management, 100–101

• Loser's games, winner's games vs., 37–41, 62–63
• Loser's game of active investing, 33, 35–45, 50, 157
  • beliefs about, 35–37
  • future of, 71
  • and levels of investor decisions, 161–162
  • and self-destruction of winner's games, 41–43
  • strategies for winning, 44–45

• Losses, 109–110, 124
• Lucent Technologies, 240
• Luck, 19, 25, 64, 79, 274

M

• Mahan, Alfred Thayer, 225–226
• Malkiel, Burt, 17, 30, 271
• Managed economy, 254
• Management, by investment committees, 142, 143
• Mao Tse-tung, 225n3
• Marginal cost of active management, 131
• Margin of safety, 68, 155
• Market(s):
  • average performance of, 249
  • Edwin C. Johnson on, 6
  • as distraction from investment program, 66, 272
  • fluctuations in, xv, 54, 67, 114, 145, 151, 251, 254
  • global integration of, 123–124
  • impact of Computer People on, 204
  • major changes in, 20–28, 188
  • portfolios constructed to withstand, 224
  • reaction of, to share repurchases, 311–312
  • and specialist manager paradigm, 217

• Market efficiency:
  • Fama's hypothesis on, 16
  • Ben Graham on, 289–290
  • and history of active investing, 77, 79
  • increasing, 1, 50–51, 74
  • and returns for active management, 74, 165
  • as social good, 123–124

• Market timing, xiv, 36, 70, 192, 265. See also Beating the market
• Markowitz, Harry, 16
• Martin-Marietta Inc., 304
• Massachusetts, Prudent Man Rule in, 252
• Massachusetts Investors Trust, 12
• Maury, Matthew Fontaine, 183
• Medicine, analytic model of, 182
• Mencken, H.L., 168
• Merrill Lynch, 76, 183
• Micawber;s law, 68
• Mies, van der Rohe, Ludwig, 44, 169
• Minnesota, income tax in, 292
• Mission:
  • of investment committees, 138, 143–144
  • of investment professionals, 49–53

• Mitchell Hutchins, 200
• Modern capital theory, 229–231
• Money Game, see Active “performance” investing
• Money market funds, 240, 249
• Monsanto Chemical Company, 311
• Moody's Utility Average, 255–257, 257t
• Morgan, J.P., 131, 153, 192, 207
• Morgan Bank, 200
• Morgan Guaranty Trust, 183
• Morningstar, 121
• Morrison, Samuel Elliot, 37, 39, 44
• Multimarket multiproduct paradigm, 215–220
• Munich Marathon, 107–109
• Mutual funds:
  • demand for, 12–13
  • fees for, 31, 32t, 67
  • in history of active investing, 7–8, 75
  • performance of, 11–13, 12f, 16, 81, 128
  • switching, 160–161
  • underperformance by, 23t, 24–28, 112–113, 112t, 157–158

N

• National retirement security problem, 243–250
  • addressing, with fairness and justice, 243–244
  • and asset mix for retirement funds, 249
  • current scope of, 244
  • defined-benefit vs. defined-contribution plans, 245–246
  • five factors in retirement security, 247–248
  • and retirement age, 245
  • and Rule of 72 for compounding, 248–249

• Natural resource companies, 292
• Navigation, 183
• Neff, John, 169
• New York Edison Co., 287
• New York Stock Exchange (NYSE):
  • amateur investors in, 74, 158–159, 194–195
  • “incorrect” prices on, 289
  • institutional investors in, 188, 194
  • professional traders in, 271
  • share repurchases and trading volume, 298
  • trading volume, 20–22, 21t, 50, 76, 112

• Northwestern University, 61
• NYSE, see New York Stock Exchange

O

• Objectivity, 44–45
• Ogilvy, David, 208
• Open market transactions, repurchase, 311
• Open operations by investment managers, 99–105
  • incentives for, 105
  • information for, 102–103
  • investment committees vs., 101–102
  • and staff analysts, 103–104
  • and traders, 104–105
  • traditional investment management vs., 100–101

• Operations research, 204
• Opportunity costs, xiv–xv, 167–168, 251, 263, 305
• Optimism bias, 29, 70
• Optimum capital structure, 310–311
• Organized knowledge, need for, 283–284
• Ovid, 288

P

• Pareto's Law (80/20 Rule), 29–30, 84, 128
• Passive investing, 16–20, 122, 161. See also Indexing and index funds
• Past performance:
  • enhanced reports of manager's, 132
  • of investment strategies, 273
  • manager selection based on, 51–52, 121
  • predictive power of, 121, 193, 273

• Past-purchase rationalization, 28
• Patton, George S., 39
• Payment acceleration, 293
• Peel, Robert, 281
• Pension Benefit Guaranty Corporation, 240
• Pension funds:
  • bond investments for, 251–259
  • and fees, 200
  • in history of active management, 8–10, 75–76
  • investment committees of, 138
  • policy decisions by, 227–231
  • Prudent Man Rule for trustees of, 252, 253
  • rate of return assumption for, 151
  • and specialist manager paradigm, 216–217

• Pension plans, defined-benefit vs. defined-contribution, 239–242, 245–246
• Performance-based investing, see Active “performance” investing
• Per-share earnings, from share repurchases, 305–308, 312
• Peter Principle, 212
• Philadelphia National Bank, 316, 322
• Planning, strategy formation vs., 209–210
• Polaroid Corporation, 240
• Portfolio construction, for disruptive markets, 224
• Portfolio diversification, 167–170
• Portfolio management, 89–92, 101–102
• Portfolio turnover rate, 42
• Poverty, 124
• Power law curve, 114
• Price discovery, 74, 77–79, 84–85, 113–115, 122
• Price-earnings ratios, 96–97, 257–258, 288
• Princeton University, xv
• Priorities, of investment professionals, 53–55
• Private equity funds, 50
• Professional development, 210
• Professional investors, 111–117
  • active investing by, 111–117
  • difficulty of outperforming competition for, 113–114
  • and history of active management, 19, 74, 114–116, 119, 159, 165
  • market changes due to increase in, 20–28, 195, 271
  • underperformance by, 112–113
  • value proposition presented by, 116–117

• Profession of investment management:
  • conflict between business and, 119, 208
  • Ben Graham on, 282–283
  • performance investing and, 77, 84–86
  • performance of, 159, 160, 181
  • retirement security as problem for, 238–243
  • success in, 214

• Profitability, 25, 53, 100–105, 191–192
• Prudent Man Rule, 252–253
• Public policy, retirement security and, 240–244

Q

• Qualified Security Analysts, 282–283

R

• Railroad Retirement Act, 235
• Ramo, Simon, 37–39, 44
• Raskob, John J., 41
• Rational capital structures, 308–311
• Reality, appearance and, see Appearance and reality
• Regulation Fair Disclosure (Regulation FD), 22, 50, 74, 113
• Regulatory Agency Bill, 318–320
• Resistance to changing beliefs, xv, 30, 35–36, 163, 245
• Resources, identifying, 63, 67
• Retirement age, 233–236, 245, 247
• Retirement security:
  • bond investments for, 261–263
  • five factors in, 247–248
  • guidance from investment professionals for, 237–242
  • life expectancy, retirement age, and, 233–236
  • as national problem, 243–250
  • and need for investment counseling, 57–58

• Returns, fees as percentage of, xiv, 31–32, 52, 116, 123, 131, 199–200, 273
• Revenue Act (1964), 291–293
• Reverse dilution, 296–297, 297t, 310
• Risk, underperformance and, 51
• Risk-adjusted incremental returns, fees as percentage of, xiv, 31–32, 52, 79, 200
• Risk management, 144, 145, 151, 188, 230
• Risk tolerance, 69, 75, 168
• R.J. Reynolds Tobacco Company, 302
• Robison, James, 308
• Rockwell-Standard Corporation, 311
• Rogers, Everett, 3, 4, 82, 83
• Roosevelt, Theodore, 225
• Roth, Allen, 18
• Rothschild, Baron, 284
• Rule of 72, for compounding, 248–249, 275–276
• Russell 1000 Index, 120
• Russell 2000 Index, 120
• Ruth, Babe, 179

S

• Sampling error, 186, 187
• Samsonite Corporation, 14
• Samuelson, Paul, 17–18
• Saving, 247, 249, 275
• Savings accounts, 62
• Scudder, Stevens & Clark, 9, 77
• SEC, see US Securities and Exchange Commission
• Secular trends, identifying, 114
• Securities. See also Bonds; Common stock
  • exchanging of, 311
  • short-term, corporate holdings in, 303, 303t

• Security analysis, as profession, 282–283
• Self-evaluation, investment committee, 146–151
• Self-knowledge, 68–69, 178–179, 224, 274
• Selling decisions, 44
• Senate Committee on Banking and Currency, 316, 319–320
• Senior securities, exchanging, 311
• Separate accounts, for fund executives, 135–136
• Servant leadership, 148
• Service-centric investment firms, 58–59
• Share repurchases, 295–313
  • alternatives to, 301–304
  • arguments against, 299–301
  • benefits of reverse dilution, 296–297, 297t
  • cost analysis for, 309–310
  • market reaction to, 311–312
  • and other methods of reducing shares, 311
  • per-share earnings from, 305–308
  • present practice, 297–298
  • for rational capital structure, 308–311

• Sharpe, Bill, 16
• Sherman Antitrust Act, 316–317, 320
• Short-term securities, corporate holdings in, 303, 303t
• Shwed, Fred, 193–194
• Siegel, Jeremy, 262
• Signs, symptoms vs., 182
• Silver, Nate, 11, 121
• Skilling, Jeffrey, 237
• Small-capitalization stocks, 120, 158
• Small numbers, law of, 114
• Smith, Adam, 5–7, 64
• Snow, C.P., 203
• Social Security benefits, xv, 234, 236, 249, 275
• Society, benefits of active investing for, 123–125
• “Soft” decisions, 209
• Sohio, 292
• S&P 500 Index, 36–38, 43, 69, 157, 183–185
• SPDRs (Standard + Poor's Depositary Receipts), 15n27
• Specialist manager paradigm, 215–217
• Speculation, 75, 189, 286–288
• Spending, 151–153, 247–249
• SPIVA (S&P Indices Versus Active) data, xiv
• Staff analysts, 103–104
• Standard Oil, 239
• Standard + Poor's Depositary Receipts (SPDRs), 15n27
• Standards, defining, 91
• Stanley-Warner, 292
• State Street Fund, 12
• Stockholders, repurchase as unfair to, 301
• Stockholder standard reappraisal index, 304–308, 307t, 310
• Stock prices:
  • investor mistakes related to, 275
  • long-term view of, 66, 272
  • performance investing and, 96–97
  • and rise of professional investors, 115

• Strategy:
  • investment firm, 209, 221–226
  • investment program, 63
  • phases of, 100
  • planning vs. forming, 209–210
  • tactics and, 222–225
  • for winning at loser's game, 44–45

• Stubbornness, 223–224
• Subjective meaning, of numbers, 233–234
• Sun Tzu, 224–225
• Supreme Court, U.S., 316, 321–322
• Surplus, distribution of, 302
• Swensen, David, 68, 144, 225
• Symptoms, signs vs., 182

T

• Tactics, strategy and, 222–225
• Target-date funds, 58
• Taxes, 22n37, 291–293
• Technology:
  • for analysis, 182–184
  • and culture of Computer People, 203–206
  • taking advantage of, 225, 226

• Tender offers, 311
• Tenure, at successful firms, 212
• Thomas, Lewis, 182
• Tipping point, 3, 82
• Tisch, Larry, 169
• Tobin, James, 68, 152
• Top Quartile results, xiv, 128, 149, 163
• Total Financial Portfolio, xv, 263, 275
• Traders, 94, 104–105
• Trading frequency, 67, 189, 272
• Trust, in professionals, 237–238
• Trustees, Prudent Man Rule for, 252–253
• TRW Inc., 304
• Tsai, Gerry, 7
• Turnover:
  • investment, 224–225, 272
  • and investment committee best practices, 148–150
  • investment manager, 149–150, 186, 212
  • at successful firms, 212

• 12b-1 fees, 31–32, 79

U

• UAW (United Auto Workers), 8, 216
• UCLA (University of California, Los Angeles), 286
• Uncertainty, 95, 222
• Underperformance:
  • and active investing, 43, 116–117
  • for institutional investors, 127–139
  • by investment firms, 207
  • by investment managers, 186–189
  • of mutual funds, 23t, 24–28, 112–113, 112t, 157–158
  • by professional investors, 112–113
  • and risk, 51

• United Auto Workers (UAW), 8, 216
• US Department of Labor (DOL), 239, 246
• US Securities and Exchange Commission (SEC), 22, 74, 113, 238–239, 246, 312
• US Treasury, 261, 262
• University of California, Los Angeles (UCLA), 286
• U.S. Express Co., 286
• U.S. Steel, 287
• Utility function, 69
• Utility industry, tax cuts in, 292

V

• Values:
  • of investment firms, 210
  • of investment professionals, 48, 53–55

• Value discovery, 85, 87
• Value proposition, 77–78, 116–117, 131
• Vanguard, 11–12, 14

W

• Wall of money, 153
• Washington Post Company, 169
• Weighted average cost-of-capital analysis, 309–310
• Wells Fargo, 14
• West, Mae, 55, 160
• Williams, Charles M. “Charlie,” 315, 316
• Williams, Serena and Venus, 62
• Williams, Ted, 177–180
• Winner's game(s):
  • achieving your objective in, 108–109
  • active investing as, 33–34, 41–42
  • correcting errors by investment professionals in, 47–59
  • developing your own plan for, 171–172
  • indexing and ETFs in, 163–165
  • investment programs in, 61–71
  • loser's games vs., 37–41, 62–63
  • self-destruction of, 41–43
  • strategies for turning loser's game into, 44–45

• Winning triangle, 63
• Wolfe, Tom, 30
• Woods, Tiger, 62
• Wright, J. D., 304

Y

• Yale University, xv, 68, 144, 183, 221, 269, 316
• Yield, on bonds vs. equities, 255–257, 262
• Young, Alan, 295