artford, CT: Worthington, Dustin, 1870).Chapter 51. Mark Leibovich, “A Rain God Confronts a Harsh Climate: CEO’s OptimismTested by Downturn,” Washington Post (April 6, 2001).2. John F. Wasik, “Nestegg,” Modern Maturity (January/February 2002).3. “Jennifer Lopez Is a Pain in the Butt,” National Enquirer (April 25, 2001).4. Robert Sobel, When Giants Stumble: Classic Business Blunders and How to AvoidThem (Upper Saddle River, NJ: Prentice Hall Press, 1985).5. Sir Harold Nicolson, Diplomacy (Washington, DC: Georgetown University,School of Foreign Service, Institute for the Study of Diplomacy, 1939 and 1988).6. “Cisco Head Cautions against Silicon Valley Hubris,” InfoWorld (February 29,2000).7. Kathryn Kranhold, Bryan Lee, and Mitchel Benson, “Enron Rigged Power Marketin California, Documents Say,” Wall Street Journal (May 7, 2002).8. Peter Burrows, “HP’s Carly Fiorina: The Boss,” BusinessWeek (August 2, 1999).9. Julie Schmit, “Aggressive Chambers Powers Cisco,” USA Today (August 13,1996).10. Andy Reinhardt, “Meet Cisco’s Mr. Internet,” BusinessWeek (September 13, 1999).
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11. Joseph Menn, “Cisco Posts 49% Jump in Profit,” Los Angeles Times (February 9,2000).12. Andy Reinhardt, “The E-Biz 25,” BusinessWeek (May 2000).13. Scott Berinato, “What Went Wrong at Cisco,” CIO Magazine (August 1, 2000).14. “Cisco Chief Outlines Vision of the Internet of the Future,” Confederation of Indian Industry press release (January 17, 2001).15. Nick Heil, “Eight Great Blunders,” Outside Magazine (February 2002).16. Alan Lightman, Great Ideas in Physics (New York: McGraw-Hill, 2000).17. Michael Lewis, “Self-Conscious Emotions,” Gale Encyclopedia of Childhood andAdolescence (January 1, 1995).18. Arthur Niederhoffer and Alexander B. Smith, “Power and Personality in the Courtroom: The Trial of the Chicago 7,” Connecticut Law Review (Winter 1970–1971).19. James C. Collins, Good to Great: Why Some Companies Make the Leap and OthersDon’t (New York: HarperCollins, 2001).20. “Web-Exclusive Interview: Good Questions, Great Answers,” Fast Company (October 2001). Available from http://www.fastcompany.com/online/51/goodtogreat.html.21. Jose Raul Capablanca, My Chess Career, rev. ed. (Mineola, NY: Dover Publications,1966).22. William J. Mitchell, “Do We Need Skyscrapers?” Scientific American (December1997).23. Alcoa executive’s Architectural Forum interview, cited in Judith Dupre, Skyscrapers: A History of the World’s Most Famous and Important Skyscrapers (New York:Black Dog & Leventhal, 2001).24. Ayn Rand, The Fountainhead (New York: Penguin Books, 1971).25. Paul Krugman, “Enron Goes Overboard,” New York Times (August 17, 2001).26. Jeffrey Tomich, “Enron to Sell Ballpark Naming Rights for $2.1 Million,”Bloomberg News (February 27, 2002).27. “Stadium Jinx: What to Call Enron Field? ‘Enron Folds,’ Maybe,” Wall Street Journal (December 4, 2001).28. James P. Cramer, ed., Almanac of Architecture and Design (Norcross, GA: Greenway Consulting, 2002).29. Richard Roll, “The Hubris Hypothesis of Corporate Takeovers,” Journal of Business, vol. 59, no. 2 (1986): 197–216.Chapter 61. Sidney Cottle, Roger F. Murray, and Frank E. Block, eds., Graham and Dodd’s Security Analysis, 5th ed. (New York: McGraw-Hill, 1988).2. Janet Lowe, Benjamin Graham on Value Investing: Lessons from the Dean of WallStreet (Chicago: Dearborn, 1994).3. Benjamin Graham, Intelligent Investor (New York: Harper & Row, 1973).4. M. Diamond and H. K. Sigmundson, “Sex Reassignment at Birth: Long Term Review and Clinical Implications, Archives of Pediatric and Adolescent Medicine, vol.151 (1997): 298.
374 NotesChapter 71. Thomas Henry Huxley, “Science and Morals,” Essays Upon Some ControvertedQuestions (London: Macmillan, 1886).Part Two1. David Bronstein, The Modern Chess Self-Tutor (New York: Cadogan, 1995).Chapter 81. Francis Galton, “Kinship and Correlation,” North American Review 150. Quoted inStephen M. Stigler, The History of Statistics: The Measurement of Uncertainty before1900 (Cambridge, MA: Harvard University Press, 1890).2. Reed Hastie and Robin M. Dawes, Rational Choice in an Uncertain World (London:Sage, 2001).3. “Purdue University’s Spurious Correlations Contest, 2000 Winners” (2001).Available from http://www.mrs.umn.edu.4. James O’Shaughnessy, What Works on Wall Street (New York: McGraw-Hill, 1998).Chapter 91. F. A. Hayek, The Fatal Conceit: The Errors of Socialism (Chicago: University ofChicago Press, 1988).Chapter 101. Gerard Piel, The Age of Science: What Scientists Learned in the Twentieth Century(New York: Basic Books, 2001).2. Sanford Jacobs, ed., The Quotable Investor (Guilford, CT: Lyons Press, 2001).3. Fischer Black, “Yes, Virginia There Is Hope: Test of the Value Line Ranking System,” Financial Analysts Journal (September/October 1973): 10–14.4. Mark Hulbert, The Hulbert Financial Digest (January 2001).5. James J. Choi, “The Value Line Enigma: The Sum of Known Parts,” Journal of Finance and Quantitative Analysis, vol. 35, no. 3 (September 2000).6. Robert S. Kaplan and Roman L. Weil, “Risk and the Value Line Contest,” Financial Analysts Journal (July/August 1973).7. Gur Huberman and Shmuel Kandel, “Market Efficiency and Value Line’sRecord,” Journal of Business (April 1990).8. William A. Sherden, The Fortune Sellers (New York: Wiley, 1998).9. Will Durant and Ariel Durant, The Lessons of History (New York: Simon & Schuster, 1968).Chapter 111. Paul Dickson, Baseball’s Greatest Quotations (New York: Harper, 1992).2. Larry Ritter, The Story of Baseball (New York: Beech Tree, 1999).3. Robert Whiting, You Gotta Have Wa (New York: Vintage, 1990).
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Chapter 121. Henry George, Progress and Poverty (San Francisco: W. M. Hinton, 1879).2. Yoon Dokko, “Real Estate Income and Value Cycles: A Model of Market Dynamics,” Journal of Real Estate Research, vol. 18, no. 1 (1999): 1–27.3. Lucy Komisar, “Joseph Stiglitz,” Progressive (June 2000).4. Jun Han and Youguo Liang, “The Historical Performance of Real Estate Investment Trusts,” Journal of Real Estate Research, vol. 10, no. 3 (1995): 235–262.5. “REITs’ Low Correlation to Other Stocks and Bonds Is Key Factor for Portfolio Diversification,” NAREIT press release (May 29, 2001).6. Ronald W. Kaiser, “The Long Cycle of Real Estate,” Journal of Real Estate Research,vol. 14, no. 3 (1997): 233–258.7. William B. Brueggeman and Jeffrey D. Fisher, Real Estate Finance & Investments(New York: McGraw-Hill, 2001).8. Homer Hoyt, One Hundred Years of Land Values in Chicago: The Relationship of theGrowth of Chicago to the Rise of Its Land Values, 1830–1933 (Washington: BeardBooks, 2000).9. Ray A. Smith, “New Report Questions Strength of REIT Results,” Wall Street Journal (December 18, 2001).10. Gary Eldred and Andrew Mclean, Investing in Real Estate (New York: Wiley, 2001).11. Robert Kiyosaki and Sharon Lechter, Rich Dad, Poor Dad (New York: WarnerBooks, 2000).12. Michael C. Thomsett, J. K. Lasser’s Real Estate Investing (New York: Wiley,2002).13. Jon Markman, “Buy What the S&P Trashes and Get Rich Quick,” CNBC Money(December 12, 2001). Available from http://www.cnbc.com.14. Dean Starkman, “Office Buildings Had Sharpest Vacancy Rise in 2001,” WallStreet Journal (January 31, 2002).15. Victor Niederhoffer and Laurel Kenner, “Sinking Real Estate Means RisingStocks” (February 14, 2002); “9 Reasons REITs Are about to Get Rocked” (February 21, 2002); “More Evidence REITs Are on the Brink” (February 28, 2002); and“Small Business or Big, the Rules Are the Same” (March 7, 2002). CNBC Money,Available from http://www.cnbc.com.16. Robert Burgess, “U.S. Office Market Recovery to Be Delayed, Torto Says,”Bloomberg News (September 19, 2002).17. Peter Grant, “Commercial Real Estate May Damp the Economy,” Wall Street Journal (February 25, 2002).
Chapter 131. Gordon Kane, Supersymmetry: Unveiling the Ultimate Laws of Nature (Oxford,England: Perseus Press, 2000).2. David Batstone, “Debate: Charles Sanford,” Business 2.0 (October 1998). Availablefrom http://www.business2.com/articles/mag/0,1640,12749%7C2,FF.html.
376 Notes3. Charbel Tannous and Alain Fessant, “Combustion Models in Finance” (December 12, 2001). Available from http://arxiv.org/PS_cache/physics/pdf/0101/0101042.pdf.Chapter 151. Charles MacKay and Joseph De La Vega, Extraordinary Popular Delusions and theMadness of Crowds and Confusion de Confusiones (New York: Wiley, 1995).2. Theodore C. Bergstrom, “Economics in a Family Way,” Journal of Economic Literature (forthcoming).3. Abhinay Muthoo, Bargaining Theory with Applications (Cambridge, England: Cambridge University Press, 1999).4. Thomas C. Scheling, The Strategy of Conflict (Cambridge, MA: Harvard UniversityPress, 1980).5. Norman Lebrecht, The Book of Musical Anecdotes (New York: Free Press, 1985).6. N. Gregory Mankiw, Principles of Microeconomics (Fort Worth, TX: Dryden, 1997).7. George J. Stigler, “The Economics of Information,” Journal of Political Economy,vol. 69, no. 3 (1961): 213–225.Chapter 161. Juan Enriques and Ray A. Goldberg, “Transforming Life, Transforming Business:the Life-Sciences Revolution.” Harvard Business Review (March–April 2000).2. Michael S. Malone, “The Next Bubble: Is Bioinformatics the Next Big Boom . . .and Bust?” ABCNEWS.com (March 13, 2001). Available from http://abcnews.go.com/sections/business/SiliconInsider/SiliconInsider_010313.html.Chapter 171. Jacob K. Thomas and Huai Zhang, “Inventory Changes and Future Returns,”working paper, December 2001.Chapter 181. Francis Galton, The Art of Travel (London: John Murray, 1883).2. Henry Clews, Twenty-Eight Years in Wall Street (New York: J. S. Ogilvie, 1887).3. “Heretics’ Almanac, 1986–96,” Economist (December 20, 1986).4. Julian Simon, The Ultimate Resource 2 (Princeton, NJ: Princeton University Press,1996).5. Dean Keith Simonton, Genius, Creativity, and Leadership: Histriometric Inquiries(Cambridge, MA: Harvard University Press, 1984).6. Andrew Orlowski, “Monday Night at the Single’s Club? Apple’s Real People.The Register (June 17, 2002). Available from http://www.theregister.co.uk/content/35/25750.html.7. Jacques Barzun, From Dawn to Decadence: 500 Years of Western Cultural Life, 1500to the Present (New York: HarperCollins, 2000).8. Marcia Vickers and Mike McNamee, “The Betrayed Investor,” BusinessWeek (February 25, 2002).
INDEX
AARP magazine (Modern Maturity), 134Abbott Laboratories, 146, 147Abelson, Alan, 15, 36, 115–132, 178appeal to fear in columns of, 121–122career, 119–121and the Dow (1989–2001), 131interview with, 119–121propaganda and pseudo-science incolumns of, 122–125selections from “Up and Down WallStreet” (1990–1999), 126–129on statistics, 120why people believe, 124Acampora, Ralph, 72Accounting:acquisition, 56, 157, 161auditors, change of, 57double-entry bookkeeping, 316Enron practices, 66, 136, 175, 320, 338frauds, 28, 161, 325 (see also Earningspropaganda)pooling of interest, 157practices obscuring company’sfinancial health, 55–58stock options, 57timing of method switch, 57Accounts receivable, inventory and, 57,315, 329–332, 334, 336
Acquisitions:accounting, 56, 157, 161advice from Grossman, 161–162performance and, 157, 159–160Active Trader magazine, Internet store,75Adelphia, 41Aether Systems, 166–167Aggregation, fallacy of, 63, 203AIG, 338Akerlof, George, 308Albert, Jim, 81Alcoa, 150Alekhine, Alexander, 281Alexander, Barry, 262Alexrod, Ivan, 45Allergan, 83Allstate, 146Amazon.com, 29, 142, 155, 330American Greetings, 83Analysts, Wall Street, 30, 67–69Anderson, T. W., 200AOL Time Warner, 146Apple Computer, 83, 164Applied Performance Strategies Inc.,190Arms, Richard (Arms Index/TRIN),90–92, 93, 111–113
377
378 IndexArthur Andersen, 41, 338Asia:markets diving in, 24, 26, 27skyscrapers, 149Thailand, 2, 7, 26, 249Asset impairment charges, 57Asymmetric information, 298, 308–309Attenborough, David, 336Auditors, change of, 57Ax, 100Bacon, Francis, 265Bacon, Robert L., 20, 348–349Balanced portfolio (Devil’s definition),345Bandwagon, 62, 103, 123Bankers Trust, 28Bargaining, 18, 291–299keeping doleful mien, 297picking time/place, 295–297value of information, 297–298watching costs, 294–295Barnaby, Jack, 361Barron’s, 36. See also Abelson, AlanBarzun, Jacques, 360Baseball, 17, 235–245Home Run Indicator, 236–240new century, new game, 240–242timeline, and financial markets(1792–2001), 243–245Beachem, John, 40Bendix, 163Bennett, Jay, 81Bentley College, 108Bergstrom, Theodore C., 296Berkshire Hathaway, 34, 40, 148, 167Berman, Susan, 325–326Bernhard, Arnold, 221Bezos, Jeffrey, 29, 155Biggs, Barton, 127, 128Biomet, 146Biotechnology, 18, 301–312drug trials (Niederhoffer-KennerZhang), 309–311examples of deadly FDA delays, 306invisible victim, 304–306memes, 35old phase 2, 303–304profit from asymmetry, 308–309trader’s apprentice, 304trial, 306–308
Bisguier, Art, 99, 283, 290Black, Fischer, 224Blair, Tony, 35, 40Bleiberg, Robert, 120Blodget, Henry, 67, 68, 69Boards of directors, celebrities on,162–163Boastful 13 study, 142–146, 164. See alsoHubrisBodie, Zvi, 105Bond, John Reginald Hartnell, 163Bonuses, 30Books, recommended, 342, 361–365Invasion of the Body Snatchers (Finney),1, 2, 5, 13, 335, 362–365Triumph of the Optimists (Dimson,Marsh, and Staunton), 17, 76, 77,82, 206–216, 320, 362Boyle, Patrick, 298–299, 358Bronstein, David, 182–185Brueggeman, William B., 253Buffett, Mary, 29–30Buffett, Warren:acquisitions, 167, 169arrogance vs. humility, and, 148–149influence of, 272memes, 29–30, 34, 37, 38, 40technical analysts invoking name of(trend-following), 103trading costs, 294on Wright brothers, 29, 148–149Bullish/bearish, 3Burton, Sarah, 335Bush, George W., 37–38, 41, 242Buybacks, 315, 317–319, 336, 337Buying opportunity (Devil’s definition),345Cabot Market Letter, 75Calpine, 83Campbell, Donald, 351Campbell, Kirsten, 68Candlesticks, 85–90Cane awards, 343–344Capitalizing costs, 56Card stacking, 62, 103, 123, 175Carstens, Henry, 351Casanova, Giacomo, 248Cash indicators, 325–326Cash money, 316–317, 329–330Cawkwell, Simon, 74
IndexCelebrity, 147–148, 162–163Celera, 35, 40–41Cendant, 83Century as time frame, 2–3, 4, 17, 206Cerent, 138CGNU, 163Chambers, John, 133, 136, 137–139Champion International, 338Chande, Tushar, 91Chart patterns, 73, 75. See also Technicalanalysis“Cheat the Prophet,” 349Chicago, University of (Center forResearch in Securities Prices),205–206, 304, 342Choi, James J., 225Chrysler, 155Chutzpa, 140–141Cigna, 338Circuit City, 83, 146, 147Cisco Systems, 58, 133, 134, 136, 137–139,142, 164, 332Classification system. See Value Lineclassification system for stocksClews, Henry, 344Clinton, Bill, 25–26, 27, 35, 37, 40CMGI Inc., 156Cohen, Abby Joseph, 67Coker, Duncan, 297, 354–355Colby, Robert, 91Collins, James C., 146–148Column, Kenner/Niederhoffer, 9–14Compaq Computer, 156Composition, fallacy of, 63Compustat, 76, 333–334Computer Associates, 66, 146Confidence vs. hubris, 140–141Conseco, 156Conservation, laws of. See MarketthermodynamicsContinental Airlines, 143, 145–146Contrarian (Devil’s definition), 345Conway, Flo, 121Cooling, law of (and principle of everchanging cycles), 349Core earnings, 57–58Correction (Devil’s definition), 345Correlations, 16, 187–203avoiding fallacious conclusions,198–203“Basinstoke,” 203
379
covariance, 193–196error of omission (the missing thirdvariable), 200–201error of randomness, 199–200fallacy of aggregation, 203fallacy of mobility, 201–202negative, 46scatter plots, 189–193spurious, 20, 203workhouse equation, 196–198Cost(s):corporate accounting (capitalizing/timing), 56trading, 294–295Costco Wholesale, 146Crises, avoiding, 286Cross-pollination, 265Cults, 117, 121Curtice, Harlow Herbert, 155Cycles:ever-changing, 20, 69, 82, 288,348–352real estate, stocks, and, 253–256Cymbalista, Flavia, 136Damodaran, Aswath, 58Daniels, Peter, 355–358Databases:Compustat, 333–334first, of daily prices of U.S. stocks,205–206Davies, Nigel, 148, 184Dawes, Robin M., 198Dawkins, Richard, 31Dean, Dizzy, 148Deception, 98–101, 335Deduction (element of scientificmethod), 118Defog, Daniel, 94De La Vega, Joseph, 291Dell, 83, 143Delta Air Lines, 143DeMark, Thomas, 74de Maupassant, Guy (“The Horla”), 15,23, 32Dennis, Richard, 102De Rougement, Louis, 335Desaulniers, Mike, 284–285Devil’s Stock Market Dictionary (Staricka),excerpts, 345–346Dickson, Paul, 242
380 IndexDimson, Elroy. See Triumph of theOptimists (Dimson, Marsh, andStaunton)Diversification, entropy and, 278Dividends:Devil’s definition, 345as earnings quality indicator, 315, 317,319–325Dixit, Avinash, 81Dokko, Yoon, 248–249Double-entry bookkeeping, 316Dow:Abelson vs. (1989–2001), 131performance study of companies on,334Dow, Charles, 93, 102Dreman, David, 27Druckenmiller, Stanley, 35Drug stocks, 301–312Dunn, Bill, 102Durant, Will and Ariel, 231Dynegy, 320Earnings imposters, 18, 313–339cash indicators, 325–326cash money, 316–317, 329–330Compustat confusion, 333–334Dow study, 334recognizing, 315dividends, 315, 317, 319–325inventory and accounts receivable,57, 315, 329–332, 334, 336stock buybacks, 315, 317–319, 336, 337system for, 335–339taxes, 315, 326–329Earnings propaganda, 15, 43–70. See alsoPropagandaescalation of “hide-and-seek,” 65–66false axioms about earnings, 43–44irrational ratios, 50–59practices obscuring company’sfinancial health, 55–58reasons for persistence of false beliefs,62–65ecological fallacy, 63–64fallacy of aggregation, 63fallacy of composition, 63spotting, 55–58student questioner, 59–60techniques, 60–62testing the beliefs, 46–50
Ease of Movement indicator, 93Echostar, 142Eckett, Stephen, 74Ecological fallacy, 63–64Education of a Speculator, The(Niederhoffer), 6, 11, 16, 36, 200,355Egan, Bill, 49–50Einstein, Albert, 103, 140, 265, 268Eisenberg, Howie, 8Eisenstadt, Sam, 17, 170–171, 221–222,231–233Electrolux, 146Eleswarapu, Venkat, 76Endgame (taking profits), 290Energy. See Market thermodynamicsEnriques, Juan, 301Enron:accounting practices, 66, 136, 175,320, 338bankruptcy/downfall, 39, 41, 66, 134,156, 363executives’ hubris, 4, 134, 137magazine cover indicator, 155skyscraper indicator, 149stadium indicator, 155–156stock performance, 39, 83, 142Entropy. See Market thermodynamicsEquity (Devil’s definition), 345Error of omission (the missing thirdvariable), 200–201Error of randomness, 199–200Escovedo, Glenn, 88, 89Exchanges, number/value of seats, 276Executive arrogance. See HubrisExperts, source of, 18, 341, 343–348Faber, Marc, 74Fabrik