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Must Read

Outstanding and thought provoking articles of interest to
investors, investment professionals, and students of finance.

A firm seeking a new CFO asked each of the candidates to answer a simple question. What does 2 + 2 equal? As the story goes, the job went to the only applicant who did not answer 4. What was the applicant's response? "What did you have in mind?" For some perspective on this see Pick a number, any number by Bernard Condon in Forbes (3/23/98).

Initial Public Offerings by Professor Jay R. Ritter is a chapter from the forthcoming Warrren Gorham & Lamont Handbook of Modern Finance. Ritter is one of the nation's leading authorities on IPOs and this document (in Microsoft Word 7.0) is a well writen and comprehensive review of the entire IPO process including summaries of research on the topic. It is a Must Read for investors who purchase Initial Public Offerings as well as investors and executives of firms considering going public.

The Perils of Investing Too Close to Home in BusinessWeek (9/29/97) is an article about two intriguing studies of investor behavior that were recently released. Terrance Odean studied over 10,000 investor accounts at a discount brokerage firm and found that on average, the stocks that investors sold outperformed while stocks they bought underperformed. The investors assumed that the trades would be profitable enough to cover the commissions, but the study demonstrated that the opposite occurred. The investors incurred transactions costs and also lost money (relatively) on the trades. Gur Huberman recently found that investors strongly favor investing in local companies that they are familiar with. Specifically investors are far more likely to own their local regional Bell company than the other regional Bells. The study provides evidence that investors prefer local or familiar stocks even though there may be no rational reason to prefer the local stock over other comparable stocks that the investor is unfamiliar with. See also Smart people, stupid money moves in Money Magazine (4/18/97)

It's All About Odds RR in the July/August 97 issue of Dow Jones' Asset Manager is an interview with Jack Treynor about the history of risk measures and includes references to Harry Markowitz, Franco Modigliani, Bill Sharpe, Fischer Black, Eugene Fama, Ken French, and Benjamin Graham.

The Vanguard Groups's TIC-TAC-TOE: Style Analysis and Mutual Fund Performance by John C. Bogle was the Keynote Speech at the June Morningstar Conference. The Eternal Skinflint by Scott Burns in Worth (9/79) is a follow-up article to John Bogle's work.

Long Run or Also-Ran? by Peter Bernstein (Author of Against the Gods) in Worth (July/August 1997) is an interesting article about historical returns with references to data from Ibbotson and Jeremy Siegel's Stocks for the Long Run.

The Vision Thing RR by Robert N. Veres in Dow Jones' Investment Advisor (6/97) is a thought provoking article about the future of the investment business.

History, as written by the winners in Forbes (6/16/97) is a great article about survivorship bias and historical returns and includes references to Professors Paul Samuelson, William Goetzmann, Philippe Jorion, Jeremy Siegel, and Roger Ibbotson. See also the Meeting News RR section in the September/October issue of Asset Management which discusses William Goetzmann and Philippe Jorion's Global Stock Markets in the Twentieth Century.

Does Historical Performance Predict Future Performance? by Ronald N. Kahn and Andrew Rudd of BARRA asks a simple question that has huge implications. Does the past performance of mutual funds tell us anything about future performance? See also "Do Past Winners Repeat?"

Investors debating active vs. passive management frequently don't have a complete understanding of the dynamics involved. A fact of active management is that all active managers in aggregate will equal the return of the appropriate passive benchmark before costs. For proof of this, see The Arithmetic of Active Management from Nobel laureate William Sharpe. The article originally appeared in the Financial Analysts Journal in 1991.

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