NOTES

PREFACE

1. Richard Teitelbaum, “Blankfein Flunks Asset Management as Clark Vows No More Goldman,” Bloomberg, www.bloomberg.com/news/print/2011-01-25/blankfein-flunks-asset-management-as-jim-clark-vows-no-more-goldman-sachs.html.

INTRODUCTION

1. Robin Greenwood and David Scharfstein, “The Growth of Modern Finance,” available at Social Science Research Network, 2162179 (2012).

2. Greg Smith, Why I Left Goldman Sachs: A Wall Street Story (New York: Hachette Digital, 2012).

3. Greenwood and Scharfstein, “The Growth of Modern Finance.”

4. Steve Johnson, “Billions of Dollars Wasted on Investment Advice,” Financial Times, www.ft.com/intl/cms/s/0/f20eb888-213a-11e3-a92a-00144feab7de.html#axzz2oeYIzlYn.

5. Denise Appleby, “Saver’s Tax Credit: A Retirement Savings Incentive,” Investopedia, www.investopedia.com/articles/retirement/04/031704.asp.

6. Wikipedia, “Individual Development Account,” http://en.wikipedia.org/wiki/Individual_Development_Account.

7. Morningstar, “Ibbotson SBBI Classic Yearbook,” http://corporate.morningstar.com/ib/asp/subject.aspx?xmlfile=1414.xml.

8. “Treasury Inflation-Protected Securities (TIPS),” Wall Street Journal Online, Markets Data Center, http://online.wsj.com/mdc/public/page/2_3020-tips.html?mod=topnav_2_3020.

9. “Moody’s Credit Trends,” http://credittrends.moodys.com.

10. David Harper, “The Equity-Risk Premium: More Risk for Higher Returns,” Investopedia, www.investopedia.com/articles/04/012104.asp.

11. Credit Suisse, “Credit Suisse Global Investment Returns Yearbook 2012,” www.credit-suisse.com/investment_banking/doc/cs_global_investment_ returns_yearbook.pdf.

12. William Bernstein, Deep Risk: How History Informs Portfolio Design (Eastford, CT: Efficient Frontier Publications, 2013), p. 29.

13. Investment Europe, “Credit Suisse Global Investment Returns Yearbook 2013,” www.investmenteurope.net/digital_assets/6305/2013_yearbook_ final_web.pdf.

RULE #1

1. “Individual—TreasuryDirect,” Treasurydirect.gov, www.treasury-direct.gov/indiv/myaccount/myaccount_treasurydirect.htm.

2. An explanation of how inflation is calculated is at the 3 Rules of Investing website.

3. “Treasury Inflation-Protected Securities (TIPS),” Markets Data Center, Wall Street Journal Online, http://online.wsj.com/mdc/public/page/2_3020-tips.html?mod=topnav_2_3020.

4. “Vanguard Total World Stock ETF,” Personal.vanguard.com, https://personal.vanguard.com/us/funds/snapshot?FundId=3141&FundIntExt=INT.

5. “iShares MSCI World ETF (URTH): Overview—iShares,” Us.ishares.com, http://us.ishares.com/product_info/fund/overview/URTH.htm.

6. “ACIM—SPDR MSCI ACWI IMI ETF|State Street Global Advisors (SSgA),” www.spdrs.com/product/fund.seam?ticker=ACIM.

7. “Insider Trading Overview,” http://etfs.morningstar.com/quote?t=VT.

8. “URTH iShares MSCI World ETF URTH Quote Price News,” http://etfs.morningstar.com/quote?t=URTH.

9. Funds have different classes for different fees, and some are not available to everyone—some are only available to advisors; others have minimum investments. The different classes of mutual funds are explained on the 3 Rules of Investing website.

10. Joe Tomlinson, “How Safe Are Annuities?” Advisor Perspectives, www.advisorperspectives.com/newsletters12/How_Safe_are_Annuities.php.

11. National Organization of Life & Health Insurance Guaranty Associations, www.nolhga.com.

12. William Bernstein, Deep Risk: How History Informs Portfolio Design (Eastford, CT: Efficient Frontier Publications, 2013).

13. Michael Lewis, “In Nature’s Casino,” New York Times, August 26, 2007, www.nytimes.com/2007/08/26/magazine/26neworleans-t.html?pagewanted=all.

RULE #2

1. Zvi Bodie, “On the Risk of Stocks in the Long Run,” 2001, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=5771.

2. Credit Suisse, “Credit Suisse Global Investment Returns Yearbook 2013,” www.credit-suisse.com/investment_banking/doc/cs_global_investment_returns_yearbook.pdf.

3. William Bernstein, Deep Risk: How History Informs Portfolio Design (Eastford, CT: Efficient Frontier Publications, 2013).

DEADLY TEMPTATION #1

1. Richard Brealey and Stewart Myers, Principles of Corporate Finance (New York: McGraw-Hill/Irwin, 2003), www.er.ethz.ch/teaching/Chap13_Market-Efficiency.pdf.

2. Alfred Cowles, “Can Stock Market Forecasters Forecast?” Economet-rica: Journal of the Econometric Society (1933): 309-324.

3. Michael Edesess, The Big Investment Lie: What Your Financial Advisor Doesn’t Want You to Know (San Francisco: Berrett-Koehler, 2007), p. 94.

4. Holbrook Working, “Note on the Correlation of First Differences of Averages in a Random Chain,” and M. F. M. Osborne, “Brownian Motion in the Stock Market,” in The Random Character of Stock Market Prices, ed. Paul H. Cootner (Cambridge, MA: MIT Press, 1964).

5. William F. Sharpe, “Mutual Fund Performance,” Journal of Business 39, no. 1 (1966): 119-138.

6. Michael C Jensen, “The Performance of Mutual Funds in the Period 1945-1964,” Journal of Finance 23, no. 2 (1968): 389-416.

7. IFA.com, “Step 3: Accept That Stock Pickers Do Not Beat the Market,” www.ifa.com/12steps/step3/.

8. G. William Schwert, “Anomalies and Market Efficiency,” Handbook of the Economics of Finance 1 (2003): 941.

9. Mark M. Carhart, “On Persistence in Mutual Fund Performance,” Journal of Finance 52, no. 1 (1997): 57-82.

10. Laurent Barras, Olivier Scaillet, and Russ Wermers, “False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas,” Journal of Finance 65, no. 1 (2010): 179-216.

11. Mark Hilbert, “The Prescient Are Few,” New York Times, July 13, 2008, www.nytimes.com/2008/07/13/business/13stra.html?_r=1&.

12. Bankers-anonymous.com, “Who Killed Fund Performance? We All Did,” www.bankers-anonymous.com/blog/who-killed-fund-performance-we-all-did/.

13. Wikipedia, “Bill Miller (Finance),” http://en.wikipedia.org/wiki/Bill_Miller_%28finance%29.

14. Frank Armstrong III, “Bill Miller’s Unglorious End Points Out Dangers of Running with the Crowd,” Forbes, May 1, 2012, www.forbes.com/sites/greatspeculations/2012/05/01/bill-millers-unglorious-end-points-out-dangers-of-running-with-the-crowd/.

15. Wikipedia, “Julian Robertson,” http://en.wikipedia.org/wiki/Julian_Robertson.

16. John C. Bogle, Don’t Count on It! Reflections on Investment Illusions, Capitalism, Mutual Funds, Indexing, Entrepreneurship, Idealism, and Heroes (New York: Wiley, 2010).

17. Edesess, The Big Investment Lie, p. 91.

18. This intuitive statement has been oversimplified for purposes of illustration. It is true that on any series of 10 coin tosses, the probability they will all be heads is 1/1,024, about one in 1,000. However, that doesn’t assure that if 1,000 coins are tossed, then one of them will come up heads 10 times in a row. In fact, the probability that none of them will come up heads 10 times in a row is (1,023/1,024)^1,000, which equals 37.6%. Hence, the probability that at least one will come up heads 10 times in a row is 100% - 37.6% = 62.4%.

19. The academic studies include the following: Mark M. Carhart, “On Persistence in Mutual Fund Performance,” Journal of Finance 52, no. 1 (March 1997): 57-82; Eugene F. Fama, “Market Efficiency, Long-Term Returns, and Behavioral Finance,” Journal of Financial Economics 49, no. 3 (1998): 283-306; Burton G. Malkiel, “Returns from Investing in Equity Mutual Funds 1971 to 1991,” Journal of Finance 50, no. 2 (1995): 549-572; Richard Roll and Robert J. Shiller, “Comments: Symposium on Volatility in US and Japanese Stock Markets,” Journal of Applied Corporate Finance 5, no. 1 (1992): 25-29; G. William Schwert, “Anomalies and Market Efficiency,” Handbook of the Economics of Finance 1 (2003): 939-974; Burton Gordon Malkiel, A Random Walk Down Wall Street: Including a Life-Cycle Guide to Personal Investing (New York: Norton, 1999).

DEADLY TEMPTATION #2

1. Assumes 4% real annual return. Calculation details are at the 3 Rules of Investing website.

2. Qaib.com. “Quantitative Analysis of Investor Behavior,” www.qaib.com/public/freelook.aspx?activeMenu=GLB-1.

3. Michael Kitces, “Does The DALBAR Study Grossly Overstate the Behavior Gap? (Guest Post),” www.kitces.com/blog/does-the-dalbar-study-grossly-overstate-the-behavior-gap-guest-post/.

4. Dan Hallett, “Does DALBAR Really Calculate Investor Returns?” http://thewealthsteward.com/2011/04/does-dalbar-really-calculate-investor-returns/.

5. A constant annual return of -17.7% will cause $1 invested at the beginning of year 1 followed by a $1 invested at the beginning of year 2 to end with $1.50 at the end of year 2. At a -17.7% constant annual return, the first $1 ends year 1 as 82.3¢. With the addition of a second $1 at the beginning of year 2 the investor now has $1.823, which when reduced by 17.7% results in $1.50 at the end of year 2.

6. DALBAR, “2012 QAIB Quantitative Analysis of Investor Behavior,” www.thewpi.org/pdf_files/dalbar.2012.roccy.pdf.

DEADLY TEMPTATION #3

1. CFA Institute, Financial Analysts Journal 42, no. 4 (July/August 1986), www.cfapubs.org/toc/faj/1986/42/4.

2. Harry Markowitz, “Portfolio Selection,” Journal of Finance 7, no. 1 (1952): 77-91.

DEADLY TEMPTATION #4

1. Emma Dunkley, “Absolute Return Funds’ Woes Mount,” The Independent, www.independent.co.uk/money/spend-save/absolute-return-funds-woes-mount-8348095.html.

2. Tom Lauricella, “For Retirement, ‘One Size’ Isn’t Always a Good Fit,” Wall Street Journal Online, http://online.wsj.com/article/SB123549381087960625.html.

3. More information and examples can be found on the 3 Rules of Investing website.

DEADLY TEMPTATION #5

1. Society of Human Resource Management, “401(k) Plan Fees Declined—Slightly—in 2012,” www.shrm.org/hrdisciplines/benefits/articles/pages/401k-feeseclined.aspx.

2. Seth J. Masters, “Rebalancing,” Journal of Portfolio Management 29, no. 3 (2003): 52-57.

3. John Kay, “An Averaging System to Pile Up the Pounds,” Financial Times, www.ft.com/cms/s/2/0ea67852-e971-11dd-9535-0000779fd2ac.html.

4. Claude B. Erb and Campbell R. Harvey, “The Golden Dilemma,” no. w18706, National Bureau of Economic Research, 2013.

DEADLY TEMPTATION #6

1. U.S. Securities and Exchange Commission, “Accredited Investors,” www.sec.gov/answers/accred.htm.

2. Simon Lack, The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True (New York: Wiley, 2011).

3. “Hedge Fund Gains Are Other Funds’ Losses,” Financial Times, www.ft.com/intl/cms/s/0/9c8fb776-7e49-11e1-b009-00144feab49a.html#axzz2OW3L74Gu.

4. “Hedge Fund Book’s Analysis Is Nothing New,” Financial Times, www.ft.com/intl/cms/s/0/91f418e0-3d06-11e1-8129-00144feabdc0.html#axzz21uC5BVLZ.

5. Stephanie Strom, “Harvard’s Invisible Fund-Raising,” New York Times, July 25, 2004, www.nytimes.com/2004/07/25/business/harvard-s-invisible-fund-raising.html?pagewanted=all&src=pm.

6. Kelly Bit, “Paulson’s Advantage Plus Fund Drops 51% in ‘Aberrational Year,’” Bloomberg, January 6, 2012, www.bloomberg.com/news/2012-01-06/john-paulson-s-advantage-plus-hedge-fund-drops-51-in-aberrational-year.html.

7. California Public Employees’ Retirement System, “Facts at a Glance,” www.calpers.ca.gov/eip-docs/about/facts/facts-at-a-glance.pdf.

8. Mitchell Tuchman, “Pensions: CalPERS Embraces Indexing,” Market-Watch, October 3, 2013, www.marketwatch.com/story/pensions-calpers-embraces-indexing-2013-10-03.

9. Steve Johnson, “Billions of Dollars Wasted on Investment Advice,” Financial Times, www.ft.com/intl/cms/s/0/f20eb888-213a-11e3-a92a-00144feab7de.html?goback=.gde_4117540_member_275707895#axzz2feMLxh9F.

DEADLY TEMPTATION #7

1. Greenwich Associates, “Uses of Quantitative Investment Strategies in Asia,” 2013, www.greenwich.com/greenwich-research/research-documents/greenwich-reports/2013/may/cus-blackrock-a-quant-2013-gr.

2. Eleanor Laise, “Bruised Quant Funds Seek a Human Touch,” Wall Street Journal Online, http://online.wsj.com/news/articles/SB10001424052748703649004575437290148983902.

3. David H. Bailey, Jonathan M. Borwein, Marcos Lopez de Prado, Marcos, and Qiji Jim Zhu, “Pseudo-Mathematics and Financial Charlatanism: The Effects of Backtest Overfitting on Out-of-Sample Performance,” October 7, 2013, http://ssrn.com/abstract=2308659.

4. “The Rise of Smart Beta,” The Economist, www.economist.com/news/finance-and-economics/21580518-terrible-name-interesting-trend-rise-smart-beta.

5. Investopedia, “Multi-Factor Model,” www.investopedia.com/terms/m/multifactor-model.asp.

6. E. F. Fama and K. R. French, “The Cross-section of Expected Stock Returns,” Journal of Finance 47 (1992): 427-486; and E. F. Fama and K. R. French, “Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics 33 (1993): 3-56.

7. Eugene F. Fama and Kenneth R. French, “Size, Value, and Momentum in International Stock Returns,” Journal of Financial Economics 105, no. 3 (2012): 457-472.

8. Richard Teitelbaum, “Blankfein Flunks Asset Management as Clark Vows No More Goldman,” Bloomberg, January 25, 2011, www.bloomberg.com/news/print/2011-01-25/blankfein-flunks-asset-management-as-jim-clark-vows-no-more-goldman-sachs.html.

9. Rick Ferri, “Hard to Beat a U.S. Total Market Fund,” Forbes, www.forbes.com/sites/rickferri/2012/08/13/hard-to-beat-a-u-s-total-market-fund.

10. Gary A. Miller and Scott A. Mackillop, “Rethinking Small Caps,” Financial Advisor, www.fa-mag.com/news/rethinking-small-caps-8117.html.

11. Michael Edesess, “The Small Cap Falsehood,” Advisor Perspectives, www.advisorperspectives.com/newsletters11/The_Small_Cap_Falsehood.php.

EPILOGUE

1. G. William Domhoff, “An Investment Manager’s View on the Top 1%,” University of California-Santa Cruz, 2011, www2.ucsc.edu/whorulesamerica/power/investment_manager.html.

2. G. William Domhoff, “An Investment Manager’s 2014 Update on the Top 1%,” University of California-Santa Cruz, 2014, www2.ucsc.edu/whorulesamerica/power/investment_manager_2014.html.

3. Thomas Philippon, “Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation,” no. w18077, National Bureau of Economic Research, 2012.

4. Thomas Philippon and Ariell Reshef, “Wages and Human Capital in the US Finance Industry: 1909-2006,” Quarterly Journal of Economics 127, no. 4 (2012): 1551-1609.

5. Thomas Piketty and Emmanuel Saez, “Top Incomes and the Great Recession: Recent Evolutions and Policy Implications,” paper presented at the 13th Jacques Polak Annual Research Conference, Washington, D.C., November 2012.

6. Jon Bakija, Adam Cole, and Bradley T. Heim, “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from US Tax Return Data,” Williams College, Williamstown, MA, 2010.

7. Philippon, “Has the US Finance Industry Become Less Efficient?”

8. Matt Taibbi, “The Last Mystery of the Financial Crisis,” Rolling Stone, June 19, 2013, www.rollingstone.com/politics/news/the-last-mystery-of-the-financial-crisis-20130619.

9. Aaron Elstein, “Wall Street’s Gone Rogue, Says Grantham,” Pensions & Investments, www.pionline.com/article/20100517/REG/100519866.