Books on Investing: Discussions, Reports &amp; Suggestions

Top 157. May 13, 2005 4:17 AM

» Normxxx - Critical Mass

<img align="left" src="http://images.amazon.com/images/P/0374281254.01._PIdp-schmooS,TopRight,7,-26_SCMZZZZZZZ_.jpg" border="0"> Critical Mass : How One Thing Leads to Another
by Philip Ball

The prestigious Aventis Prize for science books has been won by Philip Ball, part of the news@nature.com team and a consulting editor at Nature.

Ball bagged the £10,000 (US$19,0000) award for Critical Mass: How One Thing Leads to Another, which describes how statistics and physics have been used to explain social phenomena.

The book beat stiff competition from such literary luminaries as Richard Dawkins, Robert Winston and Richard Fortey.

Reviewer: Alwyn Scott

Readers of "Critical Mass" by Philip Ball will learn many new concepts and ideas from a skilled science writer with a doctorate in physics. His book opens with brief historical account that weaves the political confusion that engulfed Britain in the seventeenth century into early developments of science, but it is with the work of Thomas Hobbes that the author is particularly concerned. Although others had imagined ideal societies - Plato's "Republic", Thomas More's "Utopia", and Francis Bacon's "New Atlantis" come to mind - Hobbes attempted to deduce the laws of society from basic postulates in the manner that Isaac Newton had recently managed to explain planetary motion. In other words, Hobbes sought to establish a "physics of society" which is also the aim of Ball's book.

Sensitive to charges of "arrogance", Ball asserts that his work is "not an attempt to prescribe systems of control and governance, still less to bolster with scientific reasoning prejudices about how society ought to be run." Rather he would help us to understand how "patterns of behavior emerge - and patterns undoubtedly do emerge - from the statistical melée of many individuals doing their own idiosyncratic thing." Thus he uses the tools that have recently been developed in nonlinear science to understand collective social behavior. To this end, the historical introduction is followed by a discussion of the concept of probability and the corresponding growth of statistical physics that developed in the nineteenth and early twentieth centuries. The general reader who would understand these important ideas will benefit from the early chapters which clearly expound the notion of a phase change (think of boiling water or melting ice). As a central metaphor for much of the book, Ball carefully presents the Ising model, which comprises a two-dimensional array of rotating magnets (think of small compasses) each influencing the orientations of its nearest neighbors. Below a certain "temperature" (random vibrations of the magnets), the magnets all "freeze" into a certain orientation - a global effect that stems from local (nearest neighbor) interactions. To what extent, the author asks, do local interactions among people lead to the emergence of global social phenomena?

Beginning with discussions of snowflake growth, the formation of complex patterns in bacterial colonies, and the dynamics of flocking birds (in which the interactions are local), the author turns to collective phenomena involving humans, including the organization of passing rules on sidewalks and corridors, tragedies stemming from inept crowd control, path formation in parks, and the nonlinear dynamics influencing the growth of cities. These fascinating discussions are followed by a chapter on traffic flow (in which the dynamics of jamming are clearly explained) and several chapters on economics.

In the first of these, Ball considers fluctuating price levels, which Adam Smith deemed to be governed by the collective effect of an "invisible hand" as far back as the eighteenth century. An important aspect of price variations, well laid out in this book, is their statistics. If all the influences on prices were random, the variations would be governed by Gaussian statistics with large variations falling off as a negative exponential of the square. In fact, large variations are often found to be much more likely than in a random process, suggesting the statistics of Lévy flights used unconsciously both by foraging bees and also by Jackson Pollock in his famous drip paintings. Interestingly, an analysis of the S&P 500 market fluctuations shows a power-law distribution lying between Gaussian and Lévy statistics in which the likelihood of a variation is inversely proportional to a power of its magnitude. Power-law distributions have been found to govern many phenomena including the probabilities of avalanches and earthquakes, sizes of individual incomes, and growth rates of firms. From economics, Ball segues into the more slippery area of politics. Appealing to the Ising model, he considers analytic descriptions of the possible international alliances prior to the Second World War, statistics of recent voting patterns in Brazil (which are also found to follow a power law), and various models for investigating balances between social order and justice. Final chapters discuss the nature of interconnecting networks, the World Wide Web (in which the number of links to a site are governed by a power law) and analytic evaluations of strategies for international relations. Surprisingly, Ball ignores the application of collective dynamics to the human brain even though physicist John Hopfield has famously based such a description on the Ising model.

While this book is highly recommended, the author seems unaware of a seminal study of living systems published by Manfred Eigen and Peter Schuster a quarter century ago on how the first biological structures might have first become organized, which showed that three or more interacting hierarchical levels of organization are necessary for self-reproduction. In addition to being important for the emergence of life, this result has deep implications for the emergence of consciousness in our brains. Why? Human brains are organized into cognitive hierarchies, just as living organisms are organized into biological hierarchies, and cities are organized into social hierarchies. To better understand the dynamics of such intricate systems, we must move beyond the concept of emergence at a particular level of a nonlinear dynamic hierarchy to appreciate the possibilities of downward causation and positive feedback networks that extend over several hierarchical levels. Also, the author ignores the vast amount of work in cultural anthropology produced by physicist Franz Boas and his many brilliant students at Columbia University over much of the twentieth century, including Ruth Benedict's classic "Patterns of Culture".

Reviewer: Michael E Brady

This book is an excellent historical look at how scientists and social scientists have attempted to measure,analyze and discuss the effects and causes of group interactions,be they the interactions of atomic particles or speculators operating on the New York stock exchange.The author provides a superb overview of herd effects,cascades, and other types of crowd effects,as well as a good discussion of how economists have attempted to model the interactive effects of crowd behavior.Readers who are interested in this topic will find a much more detailed discussion in"The Wisdom of Crowds",by J Surowiecki(2004).John Maynard Keynes and Benoit Mandelbrot are both given appropriate recognition for their pathbreaking contributions in this area.Ball recognizes,as did Keynes and Boltzmann before him,the faddish nature of much of the social sciences , economics in particular ,in attempting to mimic mathematical physics in its approach to the use of formal mathematical methods.In many cases this leads to fads which emphasize the mere use of the technique,irrespective of any quantifiable scientific results.Ball points out that the overuse of the normal(Gaussian)probability distribution among economists is an attempt to obtain the self ordering and equilibrating structure of gas particle models within the human domain even if there is no empirical support for such a distribution.Here both Pareto,Zipf,and Mandelbrot receive credit.

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx

Top 158. Aug 6, 2005 11:39 AM

» Normxxx - Ultimate Investment Reading List

The Ultimate Investment Reading List: Feed your head.

By Pat Dorsey, CFA | 2 August 2005

You can't be a good investor without reading a lot (trust me— I've met people who've tried). Buying stocks that outperform the market is an intensively competitive endeavor, and you're handicapping yourself unnecessarily by not arming yourself with insight from the investment literature. Unfortunately, there's a lot of heavily promoted, page-filling fluff out there masquerading as useful material.

So, with some help from my colleagues, I've compiled the ultimate investment reading list. Any one of these books will help you become a better investor, and you'll be way ahead of the pack if you make your way through the whole list. I can personally vouch for almost all of them, and I've noted those that come from my colleagues' recommendations.

Starting Out
People new to investing need a grounding in the basics before learning from the great investors. Even though it's somewhat skeptical about the value of fundamental analysis, A Random Walk Down Wall Street by Burton Malkiel is a solid and wide-ranging survey of finance that's as good a place to start as any. Jeremy Siegel's Stocks for the Long Run, though often criticized as a product of the bull market, is also a good general overview of stocks as an asset class.

Analysis for Financial Management, by Robert Higgins, is one of the best (read: least painful) introductions to accounting that I've found, and you simply have to be able to understand how cash flows through a company if you plan on picking stocks. Accounting isn't exciting, but it is the language of business, and investors need to talk the talk before walking the walk. Though I'm a bit biased, I'd also recommend The Five Rules for Successful Stock Investing by yours truly— it's an accessible overview of fundamental analysis, and covers some topics that aren't always emphasized elsewhere, such as economic moats.

Finally, the unfortunately named Why Smart People Make Dumb Money Mistakes by Gary Belsky and Thomas Gilovich is the best entry-level book I've found on the fascinating topic of behavioral finance. People are wired in odd ways that cause us to make decisions that are out of whack with what we rationally "should" do. If people don't know what those flaws are, they can't consciously avoid them while investing.

Great Managers
There's no better place to learn about investing than at the feet of those who've practiced it with resounding success, and readers could do much worse than starting with Warren Buffett. My favorite of the many Buffett biographies is Roger Lowenstein's Making of an American Capitalist, after which you should read the pithy and insightful annual letters written by Buffett to shareholders of Berkshire Hathaway BRK.B. Since the letters are available for free on Berkshire's Web site, I'm comfortable stating categorically that they're the best deal available in investment education.

Benjamin Graham's The Intelligent Investor is a must-read, and the recent edition edited by Jason Zweig has copious— and excellent— footnotes that bring Graham's classic ideas into the modern age. Just as Graham is often thought of as the father of value investing, Phil Fisher is in many ways the original growth investor, and his Common Stocks and Uncommon Profits should also be high on any investor's reading list. It's the perfect complement to Graham.

Moving to the more recent stars of the investment firmament, Peter Lynch's Beating the Street is essentially the journal of a very successful money manager, which is what makes it so readable and informative. The thing I love about this book is the passion for investing that jumps off every page— if this book doesn't get you excited about picking stocks, nothing will. And proving the point that you can't judge a book by its cover (or title), You Can Be a Stock Market Genius by Joel Greenblatt is a largely unsung book that ranks in my all-time top 10. Greenblatt is the founder of Gotham Capital, and has achieved simply astounding returns by simply poking around the market's oft-forgotten corners, such as spin-offs, rights offerings, recapitalizations, and the like. You won't regret reading this one— it's relatively short, full of case studies, and engagingly written.

I'd also highly recommend John Train's Money Masters of Our Time, which profiles about a dozen successful investors of wildly varying styles, as well as Seth Klarman's Margin of Safety, which is a great read by a modern value master. A warning: The latter is out of print— if you can find a copy, snap it up.

Finally, colleagues of mine have good things to say about Marty Whitman's The Aggressive Conservative Investor, and David Dreman's Contrarian Investment Strategies. I've not read either, but the folks who've endorsed them have good taste in books, so I don't think you'll go too far wrong. I also have not yet read Poor Charlie's Almanack, which collects Buffett partner Charlie Munger's major speeches and writings over the past couple of decades, but Munger's biography— Damn Right! by Janet Lowe— was good, so I imagine a collection of thoughts from Munger himself should be even better.

Histories and Narratives
Knowing where the market has been— and becoming familiar with its more interesting characters and episodes— is second only in value to reading about great investors. History often does repeat itself, and being familiar with the market's past can help you spot bubbles and bottoms when they reappear.

John Kenneth Galbraith's A Short History of Financial Euphoria is a slim volume that's a fine place to start, while Devil Take the Hindmost by Edward Chancellor is a fantastic and in-depth history of manias through the ages. Warning: This one is best suited for history buffs and stock geeks. Though intimidating at over 800 pages, Ron Chernow's The House of Morgan is worth the effort, since the history of the Morgan banking dynasty touches almost every corner of Wall Street over the past century and a half. And one final history book— Peter Bernstein's Capital Ideas— has been often recommended to me as an interesting and accessible history of academic finance.

On the lighter side, two classics by Michael Lewis stand out: Liar's Poker and Moneyball. The former tells the story of the larger-than-life characters who made Salomon Brothers the king of bond trading in the 1980s— with some laugh-out-loud episodes— while the latter chronicles how the Oakland A's parlayed one of baseball's smallest payrolls into a winning track record. I think Moneyball has more applicable lessons about investing, but Liar's Poker is simply a great read and gives an insider's view of life inside an investment bank during a bull market.

However, I think the best book in this genre has to be Roger Lowenstein's When Genius Failed, which chronicles the rise and fall of the Long-Term Capital Management hedge fund in the late 1990s. I can't recommend this one highly enough. The story is good— LTCM really did come close to causing major financial havoc— and the lessons you can learn are even better. If there was ever a more cautionary tale about the danger of hubris in finance, I haven't read it.

In fairness, that may be because I've yet to read any of the many Enron books that have come out since that firm's demise. The two that have been recommended to me most often are Bethany McLean's The Smartest Guys in the Room, and Kurt Eichenwald's Conspiracy of Fools— though I'll note that Charlie Munger mentioned the latter at this year's Berkshire Hathaway meeting.

Make You Think
The final category of books on the ultimate investment reading list are volumes that force you to think more deeply, or in a different way, about investing. Robert Cialdini's Influence is along the same lines (though more sophisticated) of Why Smart People Make Big Money Mistakes, and shows how and why we're susceptible to persuasion by others. If you think this doesn't sound like it has anything to do with investing, think again— following the herd is one of the easiest investment traps to fall into, and Influence will help you realize when you're being led astray by the crowd for irrational reasons.

Fooled by Randomness, by Nassim Taleb, is more directly about finance, but is no less thought-provoking than Influence. Taleb explores how easily we confuse luck with skill, and the importance of knowing which is which. Taleb is more of a quantitative analyst and a trader than the other authors on the reading list, which adds to the book's appeal.

Back in the fundamental-investing camp, Bruce Greenwald's simply titled Value Investing should also be on the list. Greenwald presents a back-to-basics twist on valuation by hammering on the importance of the replacement value of assets, using some in-depth case studies to make his point. Greenwald's approach is somewhat different from the discounted cash-flow approach we use at Morningstar, which makes the book an interesting read.

Finally, I would be remiss if I didn't recommend Michael Porter's Competitive Strategy, which is still the best primer for thinking about competitive advantage. It can be repetitive and dry in parts, but it's still worthwhile. You can't understand economic moats without being familiar with Porter.

Conclusion
Needless to say, this list could have been much longer— in particular, I only mentioned shareholder letters in passing, and they are a great (and free) resource— but it's a starting point for your investment education.

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx

Pro Tells Why the Little Guy Just Can't Win

Top 159. Aug 16, 2005 10:44 AM

» bob90245 - Unconventional Success: A Fundamental Approach to Personal Inves

New York Times
August 13, 2005
by Joseph Nocera

WHEN I started out on this new book," David F. Swensen was saying the other day, "I thought I was going to take what we do at Yale and make it accessible to the individual investor." Oh, lucky day! Mr. Swensen, the chief investment officer of the Yale endowment - and to my mind, the best manager of institutional money in the United States - was going to show you and me how to invest the way he does.

To his surprise, however, the book Mr. Swensen eventually wrote, "Unconventional Success: A Fundamental Approach to Personal Investment," published this last Tuesday, turned out to be the opposite of what he intended. Its title notwithstanding, it doesn't show the little guy how to invest like Yale. Instead, it shows why the little guy will never be able to invest the way Yale does.

For all the "democratization" that has taken place in the world of personal investing the deck is still stacked against the individual. That was Mr. Swensen's fundamental discovery. And his willingness to change course and turn "Unconventional Success" into a polemic aimed primarily at mutual fund companies, but also at other Wall Street types who fleece the little guy, is to his everlasting credit. After all, he could have told us to buy stocks in companies whose products we buy at the supermarket, like a certain investment genius of a previous era.

Any regrets about that advice, Peter Lynch?

A YALE graduate and a protégé of the Nobel laureate James Tobin, David Swensen took over the Yale endowment in 1985, at the tender age of 31, after a brief stint on Wall Street. Within a few years, he had turned it into the best-run, most influential institutional fund in the country - the fund that every other institution wants to emulate.

His track record is astounding: over the last two decades, Yale has generated average annual returns of 16.1 percent, a number no one else can touch. The fund itself has grown in that time to over $15 billion from $1.3 billion, even though it now spends over $550 million a year to help cover Yale's operating budget.

Even more impressive, though, is the way Mr. Swensen and his Yale colleagues have gone about generating those returns. When Mr. Swensen first took over, Yale's portfolio held stocks and bonds, period. Like most institutional portfolios of that time, "it was neither diversified nor particularly equity-oriented," Mr. Swensen recalled. Today, the endowment has barely 5 percent in bond holdings. "The other 95 percent," he said, "are in places that we think will provide 'equity like' returns."

Which is not to say it is all in equities. On the contrary, the Yale portfolio is extraordinarily diversified, which both lifts returns and protects against disaster. At the end of the 2004 fiscal year, Yale had a mere 15 percent of its assets in domestic equities, and another 15 percent in foreign stocks. It had 15 percent in private equity, and 18 percent in "real assets," which includes investments in timber and energy. But its biggest percentage, 26 percent, was in something called "absolute return." That is a category invented by Mr. Swensen in 1990. It means hedge funds.

Before Mr. Swensen arrived on the scene, hedge fund investors were almost exclusively rich people. But he quickly realized that the best hedge fund managers were extremely skilled, and he began putting Yale's money in a variety of hedge funds. Eventually, other institutions realized that Yale was making money in good markets and bad ones, and they raced to copy Mr. Swensen's model. If you want to understand why hedge funds are exploding these days, a big reason is that every big institutional investor in the country is trying to do what Yale does.

His new book has given Mr. Swensen a greater appreciation of the enormous advantages he has as an institutional money manager, starting with the obvious fact that he has a staff that spends full-time researching investment possibilities. Thus, he takes it as a given that individuals shouldn't pick stocks themselves. "I see every day how competitive the markets are, and how tough. So the idea that you can do this yourself, that's out the window."

But as he looked around at the alternatives for individuals, he found himself horrified by what he saw - especially at the $8 trillion mutual fund industry, which is the primary means through which individuals invest in the market. Although his prose tends to be on the academic side, his sense of outrage comes through on every page of "Unconventional Success."

What is it about mutual funds Mr. Swensen finds offensive? Just about everything. He hates the way the loads and all the hidden fees mean that the investor is always behind the eight ball. (When I asked him about hedge fund fees, which are much higher, Mr. Swensen replied: "I don't mind paying a lot for actual performance. Besides, when we negotiate fees, it's sophisticated investor versus fund manager. It's a fair fight.")

He thinks that it is criminal for fund companies to allow popular funds to balloon in size, making it nearly impossible for the manager to beat the market. He hates the way the industry pushes exactly the wrong fund at the wrong time - Internet-oriented funds at the height of the bubble, for instance. (He has one example of a Schwab advertisement during the bubble that is simply devastating.) He notes, as others have before, that the vast majority of actively managed funds underperform. He uses "invidious," "investor-damaging" and "dirty scheme" to describe the general behavior of the industry.

Even the mutual fund monitoring companies don't help even the odds. Mr. Swensen absolutely skewers Morningstar, the company that has built its reputation rating mutual funds. His data shows that, like Moody's belatedly downgrading a corporate bond, Morningstar downgrades this or that poorly performing mutual fund only after the damage has been done. His core point, though, is that the for-profit fund industry has a fundamental conflict between its desire for corporate profits and its fiduciary duty to its investors. And the profit motive wins out every time.

So does Mr. Swensen offer any hope at all? Some. He thinks we'd all be better off sticking with index funds, instead of trying to beat the market. He thinks we should get our index funds from Vanguard, with its rock-bottom fees. (As a not-for-profit company, Vanguard also doesn't have the central conflict of interest.) We should have a diversified portfolio of index funds, for the same reason Yale does. We should be disciplined in our approach, especially in rebalancing our portfolio to stick to our diversification targets. Of course, this invariably means paring back on winners and increasing our investment in laggards.

But as sensible, and, in truth, not particularly unconventional, as this advice is, how many of us will actually follow it? Human beings simply aren't hard-wired to be good investors. Think about it: how many of us, really, have the fortitude to pare back our winners and buy more of our losers? Most of us do just the opposite. Heck, so do most mutual fund managers, which is why they can't beat the market either.

There is a reason we as a culture have accorded hero-like status to great investors like Warren E. Buffett and Peter Lynch. For all the cultural reinforcement we get that investing is something anybody ought to be able to master, we know in our bones it's not true. Mr. Buffett and Mr. Lynch are like great athletes, who have the skill and the emotional makeup to do something well that the rest of us can only dream about.

That describes David Swensen, too. What he has to say is worth listening to. But will we ever truly hear it?

-- posted by bob90245

Top 160. Sep 20, 2005 9:34 PM

» Normxxx - Eggheads and Bookies

Eggheads and Bookies: How `Scientific' Wagers Beat Wall Street

By James Pressley | 21 September 2005

Sept. 20 (Bloomberg)— Almost 50 years ago, two scientists at AT&T Corp.'s Bell Labs discovered a formula for beating the odds in Las Vegas and on Wall Street.

High rollers banked the strategy at blackjack tables. A hedge fund used it to reap returns almost worthy of Warren Buffett. Then U.S. Attorney Rudolph Giuliani, later to become mayor of New York, crashed the party in pursuit of junk-bond pioneer Michael Milken.

Facts can indeed be stranger than fiction, as William Poundstone shows in

Fortune's Formula : The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street
In 1961, MIT mathematics professor Ed Thorp made a small Vegas fortune by "counting cards"; his 1962 bestseller, Beat the Dealer, made the phrase a household word. With Claude Shannon, the father of information theory, Thorp next conquered the roulette tables. In this prosaic but fascinating cultural history, Poundstone tells not only what they did but how they did it. For roulette, Poundstone shows, Thorp and Shannon used a betting scheme invented by Shannon's Bell Labs colleague John Kelly, eventually applying Kelly's technique to investing, resulting in long-term records of extraordinary return with low risk. (Thorp revealed the secret in 1966's Beat the Market, but investors proved harder to persuade than blackjack players.) Many other characters figure into Poundstone's entertaining saga: a forgotten French mathematician, two Nobel Prize–winning economists who declared war on the Kelly criterion, Rudy Giuliani, assorted mobsters, and winners and losers in all types of investing and gambling games. The subtitle is not a tease: the book explains and analyzes Kelly's system for turning small advantages into great wealth. The system works, but requires unusual amounts of patience, discipline and courage. The book is good fun for the rest of us.

Poundstone, a two-time Pulitzer Prize nominee, takes us from chalkboard to stock market and back as he explains the ``Kelly formula' for gambling through the lives of those who developed and exploited the system. It is a rollicking tale about money, mathematics and greed.

The book meshes science with storytelling, evoking a cast of characters that stretches from J. Edgar Hoover and shady bookies to Nobel laureate economist Paul Samuelson, with cameo appearances by the likes of actor Paul Newman and composer John Cage. The potboiler treatment is highly readable, though at times distracting, as the book actually revolves around three brainy guys and a slew of equations.

Cycling Mathematician

The story begins with Claude Shannon, a mathematician sometimes called the father of our digital age. Shannon hit on the idea that computers should run on the binary digits 0 and 1. He rode unicycles down the halls at Bell Labs and spent much time inventing gizmos after becoming a professor at the Massachusetts Institute of Technology. His information theory has influenced everything from cell phones to DNA sequencing.

With him at Bell Labs was John L. Kelly Jr., a gun-toting physicist from Texas. Kelly used Shannon's theory to devise a gambling system that combined maximum profit with protection from ruin: The gambler scales each bet to his remaining bankroll. ``Since you bet only a prescribed fraction of what you've currently got, you can never run out of money,' Poundstone says.

Kelly apparently never used his formula to make money. It took Edward Thorp to put the system to work on Wall Street.

In 1959, Thorp was a mathematics instructor at MIT. Convinced he could beat blackjack, he spent summer nights doing calculations, swatting mosquitoes and feeding data into the university's mainframe computer, an IBM 704. When it came to cards, he found, fives are bad for players and good for the house. You can beat the odds by tracking fives.

Betting Formula

Thorp sought Shannon's help to publish a paper on his strategy and was inundated with offers of financial support for a cut of his winnings. Shannon suggested using Kelly's formula to decide how much to wager.

Thorp's system worked so well that casinos stopped taking his bets. Then Thorp turned his attention to markets, joining a stockbroker in setting up Princeton-Newport Partners, a hedge fund that racked up a compound return rate averaging 15.1 percent annually after fees in its 19-year run between 1969 and 1988. The S&P 500 Index averaged an 8.8 percent annual return in that period.

Poundstone handles this material deftly, intertwining biography and theory in fast-paced declarative sentences (often of 10 words or less) and vivid analogies. Messages moving through a traditional communication channel are likened to bowling balls in an orange crate.

Split Portfolio

His polymath penchants get the better of him at times, as he can't explain one thing without digressing into another. Shannon, for example, had a plan for making money from stock-price fluctuations: Create a portfolio that is half cash and half stock, then adjust it daily to retain the split.

Before you can ask how transaction costs would affect this plan, Poundstone has plunged into a discussion about physicist James Clerk Maxwell and quantum theory. Only later do we learn that Shannon never tried the 50-50 portfolio. ``The commissions would kill you,' Shannon said.

The book features some unlikely spoilers, including Giuliani. Federal agents raided Princeton-Newport in 1987 as part of his prosecution of an insider-trading case against Milken at Drexel Burnham Lambert.

Milken was Princeton-Newport's broker. Investors wanted out. ``While Thorp was not charged with anything, his hedge fund was mortally wounded,' Poundstone says.

Poundstone offers no moralizing conclusions. Yet his allegiances become clear near the end of the book. By now, it's August 1998, when Russia roiled global markets by devaluing the ruble and defaulting on debt. The crisis hammered John Meriwether's Long-Term Capital Management LP. The U.S. Federal Reserve pressured Wall Street's biggest banks into bailing out the hedge fund to keep it from collapsing under more than $4 billion in losses.

Investor Lessons

Thorp, meanwhile, was running a new fund, Ridgeline Partners. It returned 47 percent after fees in 1998. Had LTCM used Kelly's formula, the book implies, banks and investors might have been spared much pain.

None of this means that the formula will rain riches on anyone who uses it. The system demands deep reserves of patience and courage. Yet two simple lessons are clear:

Only gamble when you have an edge, and never bet the ranch on a single throw of the dice.

-- posted by Normxxx

Top 161. Oct 16, 2005 1:56 PM

» Jas_Jain - BLIND FAITH by Edward Winslow

Scam Lovers wouldn't like being exposed of their psychological problems that propel them to have blind faith in the long-term mantra of the Scam Market.

How many 10-year periods there have been when Real Estate and high quality bonds have out-perfomed the Scam Market?

My prediction is that we shall soon have a condition where the highest yielding US Treasury Bonds out-perform S&P 500 for 10-year and 25-year periods. This is going to be devastating for the Scam Lovers' blind faith in the mantra.

Jas

-- posted by Jas_Jain

Top 162. Oct 16, 2005 3:18 PM

» bob90245 - Re: The Death of the Corporation...

In response to The Death of the Corporation... posted by Normxxx:

Fifty years ago individual investors directly owned 91% of all stock. In 1985 the balance changed and institutions owned more than 50% of all stock. Now 68% of all stock is held by institutions, and only 32% is held by individuals.

There's a bit of confusion in this statement. I read studies that the percent of households owning stock has topped out at only around 50%. So the other individuals that Bogle is referring to must be corporate managers and other company insiders. This would infer that 50 years ago those 91% owning all stock were mainly these company insiders and not households.

-- posted by bob90245

Top 163. Oct 16, 2005 5:48 PM

» Normxxx - Re: Re: The Death of the Corporation...

In response to Re: The Death of the Corporation... posted by bob90245:

So the other individuals that Bogle is referring to must be corporate managers and other company insiders. This would infer that 50 years ago those 91% owning all stock were mainly these company insiders and not households.

Well, actually, "insiders," but not todays's kind of "insiders." Today, "insiders" generally refers to "professional management," who may not own even one share of the corporation's stock, and none of whom generally owns a "controlling" interest. "Controlling" interests are owned by "professional management" at various Funds, and who invariably vote with their brethren at the corporation (for reasons outlined by Bogle). If the Fund managers turn sour on a corporation, they "walk." They take about as much interest in a corporation they "own" as a client of Hertz takes in his rental car. Ergo, Bogle's term rent-a-stockholder, for today's shareholder.

In the old days, a substantial "controlling" interest was always held by the "founder" and/or his descendents, as in the case of Ford, and for at least three generations, IBM. Of course, it was considered a working rule that the third generation usually ran the company into the ground. (See, e.g., Ford, but it took a few more generations.) But the founder and at least the first few generations usually took a proprietary interest and didn't just "walk" if things started going sour. They made their voices heard (even at HP and Disney where they no longer held controlling interests). In many cases, as at Ford, they did not hesitate to fire the CEO!

We have discussed this before on this board about a year ago; it is the reason corporation top executives can run a corporation into the ground, all the while voting themselves increased remuneration, with impunity. It is the reason that Bogle is predicting failure for such corporations and for the policies that make this situation possible, and for the societies that enable it. The situation is becoming increasingly out of control, since the only check on the sheer greed of such top executives is shame (which, in our present society, has scarcely had much affect).

And Kirk worries about the "welfare cheats" costing us! Those "welfare cheats" are pretty penny ante besides these corporation crooks, who, unless they get too greedy, have carte blanche to destroy whole corporations together with their shareholders and employees, all the while enriching themselves.

______________

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx

Top 164. Nov 7, 2005 12:50 PM

» allancoleman - Re: Just One Thing

In response to Just One Thing posted by Normxxx:

i ordered this from Bill off his web site last week . it's been shipped and should be in my mail box this week . it'll be in my ' beach ' box with all my beach stuff ( fins , etc ) so i'll give ya a book report in a couple of days / week or so . plus i'll have a new loaner for my surfing ' ohana ' ( family ) .

-- posted by allancoleman

Top 165. Dec 3, 2005 10:03 AM

» SteveT - The Best Books of 2005

By JAY PALMER

WITH THE HOLIDAY SEASON UPON US and quiet winter nights by the fire lying ahead, it's time to stock up on some good books. Here, in the view of Barron's, are 2005's best books for business people and investors. They range wide in topic and scope, but each offers valuable lessons and all are eminently readable. So throw a few logs on the fire and settle into your favorite chair.

Throughout the year, oil prices have been blamed for practically every twitch of the stock market. But if you really want to worry, turn to Twilight in the Desert (Wiley, $24.95) by the provocative Matt Simmons, an investment banker to the energy industry. He suggests there is worse to come -- that Saudi Arabia is about to run out of oil and that in fact the country's leaders have known this for years but are deliberately distorting the facts.

DisneyWar (Simon & Schuster, $29.95), by noted business writer James Stewart, is an anecdote-filled tale of the corporate battle between Disney's former chief executive, Michael Eisner, and, among others, the founder's nephew Roy Disney. The stories of angst, egos and stress speak volumes about life in America's executive suites.

The entertainment industry, of course, is endlessly entertaining. The Big Picture (Random House, $25.95), by Edward Jay Epstein, tells how Hollywood really works. Ranging from the early days of the studio-system under the likes of Louis B. Mayer up to today, Epstein shows how stars like Brad Pitt and Nicole Kidman now make more than the studios, whose earnings come less from ticket sales than from movie tie-ins like toys and DVDs.

An earlier era of U.S. mega-moguls comes to life in Charles Morris' The Tycoons (Times Books, $28), a look at Andrew Carnegie, John D. Rockefeller, Jay Gould and J.P. Morgan. The quartet, our reviewer noted, "were like four midwives who helped deliver the baby [the American super-economy] and then fought over it, each grabbing hold of an arm or a leg and yanking with all of his might."

Some of the books from 2005 could help investors make some real dough. Just published and receiving much buzz, The Little Book That Beats the Market (Wiley, $19.95) by hedge-fund manager and Columbia Business School professor, Joel Greenblatt, offers elegantly simple advice for both children and accomplished investors. The focus: buying good companies (those with high returns on capital) at bargain prices (compared with earnings).

Wharton professor Jeremy Siegel warns against "the constant pursuit of growth" in The Future for Investors (Crown Business, $27.50). He recommends that investors buy stocks with sustainable cash flows and dividend payouts and recognize the economic power shifts from the West to China, India and the developing world.

In Unconventional Success (Free Press, $27.50), David Swensen, Yale's chief investment officer, delivers what our reviewer called "a devastating critique of investment firms that hypocritically prattle about putting their clients' interests first." Swensen says individuals would be best off with an indexed portfolio, spread over the core asset classes.

There are always other approaches. Fortune's Formula (Hill and Wang, $27), by William Poundstone, is the tale of how physicists from Bell Labs developed a formula for gambling based on probability theory. After meeting with wild success in Las Vegas, the gamblers turned to Wall Street. Their Princeton-Newport Partners hedge fund did make money with the plan -- until the firm was shut down for stock-parking practices and insider-trading problems.

The unsavory side of brokerage-house research gets a full airing in Blood on the Street (Free Press, $26) by former Wall Street Journal reporter Charles Gasparino. It details how corrupt research proliferated during the dot-com boom. Although the boundless optimism of that era has faded, the lessons are well worth remembering.

Kurt Eichenwald's Conspiracy of Fools (Broadway, $26) takes a fresh approach to another scandal of the bubble era: Enron. Written, according to our reviewer, "in the manner of a breezy crypto-thriller and told from the viewpoint of a fly on the wall," the book follows the rise and fall of the company in gory detail.

John Bogle, founder of the Vanguard mutual-funds group, launches a personal crusade against all that he sees as wrong in business and finance in The Battle for the Soul of Capitalism (Yale, $25). Among his targets: inflated corporate pay, the shaky state of the U.S. pension scene and too great an emphasis on the short term. He even suggests a high tax on short-term trading gains.

Plenty of others on Wall Street also have opinions. In What Goes Up (Little Brown, $27.95), author Eric Weiner stitches together interviews with 173 men and women of the Street. They speak out, our reviewer wrote, "on everything from Mayday (the end of fixed commissions) and Black Monday to LBO orgies, M&A mania, Milken's milkings, the collapsing of Long-Term Capital Management, crusading Spitzer and grabby Grasso."

Business books can, of course, be things of beauty. The Origins of Value (Oxford, $50), edited by William Goetzmann and Geert Rouwenhorst, would be a nice addition to any investor's coffee table. Large and lavishly illustrated, it's a collection of essays by leading scholars on everything from the invention of interest in ancient Samaria to bonds in early America.

What were 2005's big ideas? Jared Diamond's Collapse (Viking, $29.95) looks at why some societies fail (Easter Island, the Mayan civilization and Viking Greenland) while others succeed. It's a thoughtful context for investors and other citizens of Earth.

Simon Winchester's A Crack in the Edge of the World (Harper Collins, $27.95) looks at the repercussions of the Great California Earthquake of 1906. Along the way, it delves into the geological forces that created the Asian tsunami and that still threaten not only California but also the huge section of middle-America south of St. Louis -- areas along the New Madrid fault.

The World Is Flat (Farrar, Straus, $27.50), by New York Times Pulitzer Prize-winner Thomas Friedman, examines the trends bringing tech innovation, foreign investment and capital flows to the Third World. But if the Third World is to become capitalist, first it needs help, and that's the thesis of Jeffrey Sachs' The End of Poverty (Penguin Press, $27.95). The Columbia University economist lays out a plan to eliminate extreme world poverty within 20 years.

One Billion Customers (Free Press, $27), by James McGregor, zeros in on the ultimate developing market, China. A former Wall Street Journal China bureau chief, McGregor argues that the transition from the Cultural Revolution and the subsequent scramble for capitalistic wealth has scarred China and left it in desperate need of overcoming lingering barriers to growth. Some advice to Western firms entering China: "Assume your procurement department is corrupt until proven innocent."

Few subjects divide Americans more than genetic manipulation -- from cloning and stem cells to modified foods. Gina Smith's The Genomics Age (Amacom, $24) paints what our reviewer called "an enjoyable, easy-reading picture of the science for the nonscientist."

Luckily, there is always wine. And in this world, no one, absolutely no one, has had more impact on drinking and buying habits than Robert Parker. In The Emperor of Wine (Ecco, $25.95), Elin McCoy explains how Parker became so important that he can ruin a vineyard with a wine rating and influence what kinds of wines are made.

Let's raise a glass to the books of 2005.
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-- posted by SteveT