notes

CHAPTER 1 The Sure Thing Almost Nobody Plays

1. "Special Report: Money Managers," Pension and Investments, May 13, 1996, p. 23.

2. Burton Mallciel, "Returns From Investing in Equity Mutual Funds 1971 to 1991," Joumal of Finance 50 (June, 1995), pp. 549-73.

3. Equity mutual funds were most bearish at the market bottoms of 1966, 1970,1974,1987, and 1990 (cash reserves rose to 9.7,11.8,13.5,11.2, and 12.9% respectively) and were fully invested near the market tops of 1967, 1972, and 1987 (when diese reserves dropped to 5.7, 3.9, and 8.8% respectively). See Investment Company Institute, 7995 Factbook, 35di Edition (1995); Robert McGough, "How Much Cash is Enough?," Wall Street Journal, January 9, 1997, p. Rl; and Martin Zweig, Investor Expectations (New York: Martin Zweig, n.d.). Ordinarily, common stock mutual funds keep about 7% of assets in cash or its equivalent and do not change these reserves markedly. The high and low figures presented are thus quite extreme.

4. But not quite as strong, only 65% of the letter-writers were bearish.

5. See the Sentiment Index of the Leading Services produced by Investors Intelligence of New Rochelle, New York.

6. Paul Samuelson, another Nobel laureate and perhaps the most influential economist of our time, was another important contiibutor to the efficient market hypothesis.

7. Gregg A. Jarrell, "En-Nobeling Financial Economics," Wall Street Journal, November 17, 1990, p. A14.

8. See George Anders, Cynthia Crossen, Scott McMurray & Robert Rose, "Big Board Curb on Electronic Trading Results in Halt at Stock-Index Markets," Wall Street Joumal, October21, 1987 (describing the New York

Stock Exchanges unilateral move "to restore stability to its own market by handcuffing institutional traders whose [index] strategies have exaggerated swings in stock prices"); Julia M. Flynn, "Officials Halt Trading in Several Futures Pits," Aew ; 7Ime5, October21,1987 (describing 11:15 A.M. halt to trading on Mercs S&P 500 pit as "an unprecedented move"); Julia M. Flynn, "Merc Puts Daily Limits on Stock Exchange Futures," New York Times, October, 24, 1987 (intending the trading resUictions "to calm violent price swings"); James Steragold, Top Merc Official Defends Stock Futures," New York Times, October 28, 1987 (interviewing Leo Melamed, then Chairman of the Executive Committee of the Chicago Mercantile Exchange, who stated John Phelan of the New York Stock Exchange requested the Mercs S&P 500 pit be closed to reUeve the pressure of sell orders). 9. George Melloan, "The Market Meltdown Makes Phelan a Prophet," Wall

Street Joumal, October 27,1987. 10. David Dreman, "Doomsday Machine," Forbes, March 23, 1987.

CHAPTER 2 From Technical Analysis to Astrology

1. Mark Hulbert, "Long Term Performance Ratings," Hulbert Financial Digest, July 31, 1996. Mark Hulber5ts Financial Digest u-acked the performance of 12 asset allocators who write market letters from January 1,1987 to August 31, 1995. He notes that performance records are scanty on asset allocators before tiiis time. His portfolios returned 8.38% versus 11.4% for tiie S&P 500 and 10.7% for a balanced portfolio of stocks and bonds (60-40).

2. David N. Dreman, New Contrarian Investment Strategy (New York: Random House, 1982), p. 23.

3. Lewis Knox, "A not-so-random walk on the Quant Frontier," Institutional Investor, April, 1991, p. 33.

4. Jason Zweig and James M. Cash, "Show Your Hand," Forbes, June 21, 1993, p. 240.

5. The Stars Say Sell," Evening Standard, November 17, 1995, p. 36.

6. Anne Mathews, "Markets Rise and Fall, but Hes Always Looking Up," New York Times, March 12, 1995, p. C12.

7. Ibid

8. Harry V. Roberts, "Stock Market Patterns and Financial Analysis: Methodological Suggestions," Joumal ofFinance 14 (March, 1959), pp. 1-10.

9. M.F.M. Osborne, "Brownian Motion in the Stock Market," Operations Research 7 (March-April, 1959), pp. 145-173.

10. Amold B. Moore, "Some Characteristics of Changes in Common Stock Prices," in Paul H. Cootner, ed.. The Random Character of Stock Market Prices, (Cambridge: MIT Presss, 1964) pp. 139-161.

11. Clive W.J. Granger and Oskar Morganstera, "Spectral Analysis of New York Stock Market Prices," Kyklos 16 (1963), pp. 1-27.

12. Eugene F. Fama, "The Behavior of Stock Market Prices," Joumal of Business 38 (January, 1965), pp. 34-105.

13. Eugene F. Fama, "Efficient Capital Markets: II," Joumal of Finance 46 (December, 1991), pp. 1575-1617.

CHAPTER 3 Bigger Game Ahead

1. Chet Currier, "Value Managers on a Roll," Associated Press, March 22,1994.

2. Sidney Cotde, Roger F. Murray, Frank E. Block, Graham and Dodds Security Analysis, 5th ed. (New York: McGraw-Hill, 1988).

3. The capital sti4icture is defined as the proportion of debt, preferred stock, and equity in the total capital a company employs. A number of other important ratios deal with financial strength. The current rado, a rado of current assets to current liabilities, is one of the most commonly followed. This rado determines how able the company is to pay its near-term debts- those due in a year or less. For most nonfinancial companies, a current ratio of 2 to 1 or better is considered sound, although this too will vary from industry to industry.

4. Julie Rohr, "Has value investing lost its value?," Institutional Investor (June, 1991), p. 49.

5. William F. Sharpe, "Likely Gains from Market Timing," Financial Analysts Joumal 31 (March-April, 1975), pp. 60-69.

6. Arthur E. Gooding and Edward T. Owens, "Peeling away mythical perceptions of TAA," Pensions & Investments, March 8, 1993, p. 28.

7. See The Momingstar Mutual Fund Survey.

8. One new academic study by Louis Chan, Narasimhan Jegadeesh, and Josef Lakonishok, forthcoming in Joumal of Finance, claims momentum provides well above average retums for up to a year, but it does not take account of the high transaction costs. After these costs, the excess retums might be canceled out entirely.

9. Michael Jensen, for example, measured the record of 155 mutual funds between 1945 and 1964, adjusting for risk as the academics defined it, and found that only 43 of 115 funds outperformed the market after commissions. In 1970, Friend, Blume, and Crockett, of the Wharton School, made the most comprehensive study of mutual funds to that time. They measured 136 funds between January 1, 1960, and June 30,1968, and found that the funds returned an average of 10.7% annually. During the same time span, shares on the New York Stock Exchange averaged 12.4% annually. Value-weighting for the number of outstanding shares of each company (which gave far more emphasis to the changes of the larger companies), the increase was 9.9%. See Michael C. Jensen, "The Performance of Mutual Funds in the Period 1945-1964," Joumal of Finance 23 (May, 1968), pp. 389-416; and Irwin Friend, Marshall Blume, and Jean Crockett, Mutual Funds and Other Institutional Investors: A New Perspective, a Twentieth Century Fund Study (New York: McGraw-Hill, 1971).

10. No-load funds and funds with low sales charges perform marginally better

11. Eugene F. Fama, Lawrence Fisher, Michael Jensen, and Richard Roll, "The Adjustment of Stock Prices to New Informadon," Intemational Eco-