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
The Simple Logic of the CMH
A Specific Example
Reversion to the Mean
“If You Can’t Beat ’Em, Join ’Em”
The Great Paradox
The New Paradigm of Indexing
Assets and Cash Flows
A Vast Departure
Let’s Look at the Record
“Don’t Just Stand There—Do Something”
“Don’t Do Something—Just Stand There”
Wrapping Up
Lead into Gold?
Part Five - ENTREPRENEURSHIP AND INNOVATION
Chapter 21 - Capitalism, Entrepreneurship, and Investing: The 18th Century ...
Franklin’s Entrepreneurship and Invention
Vanguard’s Entrepreneurship and Invention
Investment Wisdom—Franklin in the 18th Century; Vanguard in the 20th
Virtue
Chapter 22 - Seventeen Rules of Entrepreneurship
Where It All Began
A Design for a Business?
In the Business, Then Out
A Narrow Mandate
Eliminating a Sales Force
Strategy Follows Structure
Opposition from a Formidable Source
Assets Double Every Three Years
The Fruits of Success . . . or Success for Its Own Sake?
Taking the Plunge, and Cashing In
Chapter 23 - “Vanguard: Saga of Heroes”
A Few Disclaimers
Idealism and Entrepreneurship
America’s First Entrepreneur
The Vanguard Odyssey
A Design for a Business?
What’s in a Name?
Liberal Education, Moral Education
Returning Full Circle
“The Battle for the Soul of Capitalism”
Something Went Wrong
Agents versus Principals
Facing Up to the Reality
Conclusion
Chapter 24 - When Does Innovation Go Too Far?
The Financial Sector—Costs and Benefits
Derivatives
Innovation in the Mutual Fund Industry
New Economy Funds and the Bubble
And the Beat Goes On
But Some Innovation Has Served Investors
A Self-Serving Conclusion
Wrapping Up
Part Six - IDEALISM AND THE NEW GENERATION
Chapter 25 - Business as a Calling
My First Break
Business: An Honorable Career
Markets and Economics
The Worldly Economists
Meet Some Great Need . . . Perform Some Great Deed
Chapter 26 - The Right Kind of Success
Chapter 27 - “This Above All: To Thine Own Self Be True”
A Word about Vanguard and Simplicity
Bumps along the Road of Life
Never Give Up, Never, Etc.
The Principles of Character
What Kind of Character?
Be True to Yourself
Chapter 28 - “Enough”
The Costs of the Financial Sector
Standards for a Professional Career
Chapter 29 - If You Can Trust Yourself . . .
Reflections on My Career
Reflections on Today’s Crisis
Wrapping Up
Chapter 30 - The Fifth “Never”
Chapter 31 - “When a Man Comes to Himself”
Work . . . Trade . . . Finance
Taking on the System
Labor and Capital
Part Seven - HEROES AND MENTORS
More Heroes
A Charmed Life
Chapter 32 - Walter L. Morgan
Wellington and Vanguard
Remembering Who Gave Me My First Break
Chapter 33 - Paul A. Samuelson
Priceless Endorsements
Challenge to Judgment
The Newsweek Column
Mutual Admiration
Chapter 34 - Peter L. Bernstein
Generous Grace
On the Shoulders of a Giant
Chapter 35 - Bernard Lown, MD
Enter Superman
Medicine and Finance
A Magnificent Writer
Index