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Active Management

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Lotteries

Luck

Odds of Success

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Skill?

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My favorite book discussing gambling and investing is Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone. The book tells the stories of Edward Thorp and Claude Shannon. They studied casino games looking for advantages, before turning their attention to the investment markets. Shannon's portfolio had returns comparable to Warren Buffett's Berkshire Hathaway. There is also an interview with Professor Thorp via NPR called The Quants': It Pays To Know Your Wall Street Math.

Books

• Against the Gods: The Remarkable Story of Risk and Capital Ideas: The Improbable Origins of Modern Wall Street by Peter L. Bernstein (2005 edition)
• Fortune's Formula by William Poundstone
• Innumeracy: Mathematical Illiteracy and Its Consequences and A Mathematician Reads the Newspaper by John Allen Paulos
• The Intelligent Investor by Benjamin Graham and Jason Zweig's "revised" edition
• Investment Gurus by Peter J. Tanous
• Investment Policy: How to Win the Loser's Game by Charles Ellis (2009 edition)
• The Big Short: Inside the Doomsday Machine and Liar's Poker by Michael Lewis (also author of Money Ball and The Blind Side)
• The Myth of the Rational Market by Justin Fox
• The Poker Face of Wall Street by Aaron Brown
• Stocks for the Long Run Jeremy J. Siegel (2007 edition)

References and links

• Active Management Is Uncompensated Risk (2/24/2010) and A Winning Fund Doesn't Equal A Winning Portfolio (4/22/2010) by Richard Ferri in Forbes
• How Poker Players React to Big Wins and Losses by Gary Smith, Michael Levere, and Robert Kurtzman, Management Science, (September 2009). The authors found that after big losses, players become less cautious, implying its a good idea for anyone experiencing a major disappointment to take a break given the risky tendency to try to get even shortly thereafter.
• How a Fund's Expense Ratio Can Predict Its Success by Russel Kinnel (04/24/07) Morningstar
• Mutual Fund Costs: Risk Without Reward by Stefan Sharkanski (July 2002).
• Lottery Players/Stock Traders by Meir Statman (Jan/Feb 2002) Financial Analysts Journal
• The Inefficient Market Argument for Passive Investing by Steven Thorley (September 1999) includes a great summary of sum games, and passive versus active investing, investing costs, and also discusses luck and skill.... "while investing in general is a positive-sum game, active investing is a zero sum game with respect to the alternative of indexing. One active investor's ability to outperform the index has to come at the expense of another investor's underperformance."
• Why Active Fund Managers Often Underperform the S&P 500: The Impact of Size and Skewness by Kent Womack, David Ikenberry and Richard Shockley, The Journal of Wealth Management (Spring 1998) (Earlier Version)
• The Structure of the Investment Management Industry: Revisiting the New Paradigm by Ennis, Richard (July/August 1997) Financial Analysts Journal
• The Implications of Style Analysis on Mutual Fund Performance Evaluation Starring: TIC-TAC-TOE Also Featuring: Pascal, God, Chess, and War Games by John Bogle (6/13/1997)
• On Persistence in Mutual Fund Performance Carhart, Mark Journal of Finance (March 1997) - "I also find that expense ratios, portfolio turnover, and load fees are significantly and negatively related to performance. Expense ratios appear to reduce performance a little more than one-for-one."
• The Winners and Losers of the Zero-Sum Game: The Origins of Trading Profits, Price Efficiency and Market Liquidity by Lawrence Harris (May 1993).
• The Arithmetic of Active Management by William Sharpe (Jan/Feb 1991) Financial Analysts Journal
• The Mathematics of Gambling (1984) by Edward Thorp, The Kelly Criterion in Blackjack, Sports Betting, and the Stock Market, and 50-50 and Even-Money Equivalent Bets by Alan Krigman at BJMath
• The Loser's Game by Charles Ellis (July/Aug 1975) Financial Analysts Journal

• Passive vs. Active from InvestorHome
• Play Zero-Sum Games from Elmer G. Wiens

   

   

   

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