vorites drop doesnt occur instantaneously, but over a time period of as much as 9 years, as was shown in chapters 8 and 9.

17. The information comes from a working paper I am currently completing in collaboration with Nelson Woodard (formerly of James Madison University) and Dr. Eric Lufkin.

18. We used all four contrarian measures to see if this effect worked in all cases-which it did.

19. Wemer P.M. DeBondt and Richard H. Thaler, "Does the Stock Market Overreact?," Journal of Finance 40 (1985), pp. 793-805. Wemer RM. DeBondt and Richard H. Thaler, "Further Evidence on Investor Overreaction and Stock Market Seasonality," Joumal of Finance 42 (1987), pp. 557-580.

20. Benjamin Graham, David Dodd, Sidney Cottle, and Charles Tatham, Security Analysis, 4th ed. (New York: McGraw-Hill, 1962), p. 179.

CHAPTER 12 Crisis Investing

1. As measured by the Keefe Bruyette Bank Index, a major research house specializing in banking and odier financial stocks.

2. Money center banks seemed to us to have too many other unquantifiable bad loans in addition to those of real estate. We played it safe-perhaps too safe-because on the recovery many of the money centers, including Citibank and Chemical, went up as much as tenfold or more.

3. Prices are adjusted for die merger with National Bank of Detroit in 1995.

4. Duane P. Schultz, Panic Behavior (New York: Random House, 1964), p. 49.

5. The treasuries are redeemed at face value thus ensuring the interest payments were reinvested at the same abnormally high rates in die future. The longer the period the greater the discount. As an example, a 30-year Treasury yielding 15% would be discounted by 15% for each year the bonds are outstanding. In this case die bonds would be redeemed at $100 but only cost the investor $1.51.

6. The inflation rate at the beginning of each quarter is based upon the latest reported inflation figures (Consumer Price Index) for the previous 12 months.

7. M. Rothbart and B. Park, Joumal of Personality and Social Psychology 50 (1986), p. 131. Paul Slovic, James H. Flynn, and Mark Layman, "Perceived Risk, Trust, and the Politics of Nuclear Waste," Science 254 (Dec. 13, 1991), pp. 1603-1607.

8. Paul Slovic, "Perceived Risk, Trust, and Democracy," Risk Analysis 13 (1993), pp. 675-682.

CHAPTER 13 An Investment for All Seasons

1. The book is currently being updated. Siegel took the retums from 3 sources: 1802 to 1870 from William Schwert, "Indexes of United States Stock Prices from 1802 to 1987," Journal of Business 63 (1990), pp.

399-426; 1871 to 1996 from the Cowles Indexes as reprinted in Robert Shiller, "Market Voladlity" (M.l.T. Press, 1989); and tiie 1926 to 1995 period from the CRSP value-weighted indexes of all New York. American, and Nasdaq stocks. See Jeremy J. Siegel, Stocks for the Long Run (New York: twin, 1994), pp. 3-4.

2. Edgar L. Smith, Common Stocks as Long-Term Investments (New York; Macmillan, 1925).

3. Jeremy J. Siegel, op. cit., pp. 3-4.

4. Irving Fisher, Foreward to Kennedi F. Van Stram, "Investing in Purchasing Power," Barrons (1925), p. vii.

5. Forbes, November 15, 1976.

6. William D. Nordhaus, "The Flexibility of Wages and Prices," Inflation Theory and PoUcy issue, American Economic Review 66 (May, 1976), pp. 59-64.

7. A 50% tax bracket is used, which was die bracket on $70,000 in taxable income in 1965. Tax rates ranged as high as 90% for much of the postwar period, only dropping with the Tax Reform Act of 1985. Tax adjustment assumes the following: stock dividends and T-bill and bond retums are taxed as income at die 50% rate until 1988, and at the 35% rate thereafter Stock appreciation is taxed at an assumed capital gains rate of 25%. Stocks are assumed to have a tumover rate similar to the major market averages, roughly 100% every 33 years. This is implemented by calculating the average gain over the previous 30 years (or retrospective to 1946, whichever is shorter) and taking 3% of diat amount as die taxable appreciation each year The capital gains part of the calculation is far smaller than the income tax. Inflation adjustment is calculated after adjusting for taxes.

CHAPTER 14 What Is Risk ?

1. Standard deviation measures the ups and downs of an assets retums, irrespective of what die market is doing. Eidier way, beta and standard deviation measure past retums and nothing else.

2. J. Michael , "Efficient Markets, Index Funds, Illusion, and Reality," Joumal of Portfolio Management (Fall 1977), pp. 5-20.

3. Ibid. See also Shannon Pratt, "Relationship Between Variability of Past Retums and Levels of Future Retums for Common Stocks, 1926-60," in Frontiers of Investment Analysis, 2nd edition (Scranton, PA: Intemational Textbook Company, 1971); Fischer Black, Michael Jensen, & Myron Scholes, "The Capital Asset Pricing Model: Some Empirical Tests," in Studies in the Theory of Capital Markets (New York: Praeger, 1972); R. Richardson Pettit & Randolph Westerfield, "Using die Capital Asset Pricing Model and the Market Model to Predict Securities Returns." Joumal of Financial and Quantitative Analysis (Sept. 1974), pp. 579-605; Merton Miller and Myron Scholes, "Rates of Retum in Relation to Risk: A Re-Examination of Some Recent Findings," in Studies in the Theory of Capital Markets (New York: Praeger, 1972); Nancy Jacob, "The Measure-

ment of Systematic Risk for Securities and Portfolios: Some Empirical Results," Journal of Financial and Quantitative Analysis (March, 1971), pp. 815-34.

4. Dale F. Max, "An Empirical Examination of Risk-Premium Curves for Long-Term Securities, 1910-1969," unpublished Ph.D thesis (University of Iowa, 1972), Microfilm Order No. 73-13575.

5. Marshall Blume & Irwin Friend, "A New Look at the Capital Asset Pricing Model," in James L. Bicksler (ed.), Methodology in Finance-Investments (Lexington, MA: Heath-Lexington, 1972), pp. 97-114.

6. Albert Russell & Basil Taylor, "Investment Uncertainty and British Equities," The Investment Analyst, Dec. 1968, pp. 13-22.

7. Quoting J. Michael Murphy, op. cit. (the foregoing three citations are references made by Murphy within the quoted passage).

8. Robert A. Haugen and James A. Heins, "Risk and the Rate of Retum on Financial Assets: Some Old Wine in New Botties," Joumal of Financial arui Quantitative Analysis (December, 1975), pp. 775-84.

9. Eugene Fama and James MacBeth, "Risk, Retum, and Equilibrium: Empirical Tests," Joumal of Political Economy 81 (1973), pp. 607-636; Eugene Fama, "Efficient Capital Markets: A Review of Theory and Empirical Works," Joumal ofFinance 25 (1970), pp. 383-417.

10. See Eugene Fama and Kenneth French, "The Cross-Section of Expected Stock Retums," Joumal ofFinance 67 (1992), pp. 427-465.

11. See Eric N. Berg, "Market Place: A Study Shakes Confidence in die Volatile-Stock Theoiy," New York Times, Feb. 18, 1992, p. DI.

12. Bill Bamhart, "Professors Say Beta Too Iffy to Trust: A Substitute Stock Scorecard is Proposed," Chicago Tribune, July 27, 1992, p. 3.

13. Terence P Pare, "The Solomon of Stocks Finds a Better Way to Pick Them," Fortune, June 1, 1992, p. 23.

14. Bill Bamhart, op. cit.

15. Mary Beth Grover, "Slow Growdi," Forbes, Oct. 12, 1992, p. 163.

16. David Dreman, "Bye-bye to Beta," Forbes, March 30, 1992, p. 148.

17. Bill Bamhart, op. cit.

18. Ibid

19. George M. Frankfurter, "The End of Modem Finance," The Joumal of Investing (Winter, 1993), p. 9.

20. The impact of beta went far beyond the market itself The Capital Asset Pricing Model had long been used by corporate managers to determine the attractiveness of new ventures. Because tiie accepted wisdom holds that companies with higher betas must pay commensurately higher retums, chief financial officers of high beta companies might be loath to invest in new plants unless they feel they can eam the extra dollop of retum. Said a business consultant, "Dedironing the model may have been die best thing that has happened to American business." (Terence Pare, op cit.) MPT, it seems, resulted in bad business decisions in corporate America for a long time.