Market Sense and Nonsense: How the Markets Really Work (and How They Don’t) 978-1-118-49456-1

Table of contents :
Dustwrapper - front ......Page 1
Flyleaf ......Page 2
Short Title ......Page 4
Other Books by Jack D. Schwager ......Page 5
Title Page ......Page 6
Printer's imprint ......Page 7
Congolese proverb ......Page 8
Dedication ......Page 10
Contents ......Page 12
Foreword ......Page 18
Prologue ......Page 20
Part One: Markets, Return, and Risk ......Page 24
Comedy Central versus CNBC ......Page 26
The Elves Index ......Page 29
Paid Advice ......Page 31
Investment Insights ......Page 34
2. The Deficient Market Hypothesis ......Page 36
The Efficient Market Hypothesis and Empirical Evidence ......Page 37
The Price Is Not Always Right ......Page 38
The Market Is Collapsing; Where Is the News? ......Page 47
The Disconnect between Fundamental Developments and Price Moves ......Page 50
Price Moves Determine Financial News ......Page 60
Is It Luck or Skill? Exhibit A: The Renaissance Medallion Track Record ......Page 62
The Flawed Premise of the Efficient Market Hypothesis: A Chess Analogy ......Page 63
Some Players Are Not Even Trying to Win ......Page 65
The Missing Ingredient ......Page 67
Right for the Wrong Reason: Why Markets Are Difficult to Beat ......Page 70
Diagnosing the Flaws of the Efficient Market Hypothesis ......Page 72
Why the Efficient Market Hypothesis Is Destined for the Dustbin of Economic Theory ......Page 73
Investment Insights ......Page 75
3. The Tyranny of Past Returns ......Page 78
S&P Performance in Years Following High- and Low-Return Periods ......Page 80
Implications of High- and Low-Return Periods on Longer-Term Investment Horizons ......Page 82
Is There a Benefit in Selecting the Best Sector? ......Page 86
Hedge Funds: Relative Performance of the Past Highest-Return Strategy ......Page 93
Why Do Past High-Return Sectors and Strategy Styles Perform So Poorly? ......Page 100
Wait a Minute. Do We Mean to Imply . . . ? ......Page 101
Investment Insights ......Page 108
Worse Than Nothing ......Page 110
Volatility as a Risk Measure ......Page 111
The Source of the Problem ......Page 115
Hidden Risk ......Page 118
Evaluating Hidden Risk ......Page 123
The Confusion between Volatility and Risk ......Page 126
The Problem with Value at Risk (VaR) ......Page 128
Asset Risk: Why Appearances May Be Deceiving, or Price Matters ......Page 130
Investment Insights ......Page 132
5. Why Volatility Is Not Just about Risk, and the Case of Leveraged ETFs ......Page 134
Leveraged ETFs: What You Get May Not Be What You Expect ......Page 135
Investment Insights ......Page 144
Hidden Risk ......Page 146
The Data Relevance Pitfall ......Page 147
When Good Past Performance Is Bad ......Page 149
The Apples-and-Oranges Pitfall ......Page 151
Longer Track Records Could Be Less Relevant ......Page 152
Investment Insights ......Page 155
7. Sense and Nonsense about Pro Forma Statistics ......Page 156
Investment Insights ......Page 159
Why Return Alone Is Meaningless ......Page 160
Risk-Adjusted Return Measures ......Page 165
Visual Performance Evaluation ......Page 179
Investment Insights ......Page 189
Correlation Defined ......Page 192
Correlation Shows Linear Relationships ......Page 193
Spurious (Nonsense) Correlations ......Page 194
Misconceptions about Correlation ......Page 196
Focusing on the Down Months ......Page 199
Correlation versus Beta ......Page 202
Investment Insights ......Page 205
Part Two: Hedge Funds as an Investment ......Page 206
10. The Origin of Hedge Funds ......Page 208
11. Hedge Funds 101 ......Page 218
Differences between Hedge Funds and Mutual Funds ......Page 219
Types of Hedge Funds ......Page 223
Correlation with Equities ......Page 233
12. Hedge Fund Investing: Perception and Reality ......Page 234
The Rationale for Hedge Fund Investment ......Page 236
Advantages of Incorporating Hedge Funds in a Portfolio ......Page 237
The Special Case of Managed Futures ......Page 238
Single-Fund Risk ......Page 240
Investment Insights ......Page 243
A Parable ......Page 246
Fear of Hedge Funds ......Page 248
14. The Paradox of Hedge Fund of Funds Underperformance ......Page 254
Investment Insights ......Page 259
15. The Leverage Fallacy ......Page 262
The Folly of Arbitrary Investment Rules ......Page 264
Leverage and Investor Preference ......Page 265
When Leverage Is Dangerous ......Page 266
Investment Insights ......Page 268
16. Managed Accounts: An Investor-Friendly Alternative to Funds ......Page 270
The Essential Difference between Managed Accounts and Funds ......Page 271
The Major Advantages of a Managed Account ......Page 272
Individual Managed Accounts versus Indirect Managed Account Investment ......Page 273
Why Would Managers Agree to Managed Accounts? ......Page 274
Evaluating Four Common Objections to Managed Accounts ......Page 276
Investment Insights ......Page 282
Postscript to Part Two: Are Hedge Fund Returns a Mirage? ......Page 284
Part Three: Portfolio Matters ......Page 288
The Benefits of Diversification ......Page 290
Diversification: How Much Is Enough? ......Page 291
Randomness Risk ......Page 292
Idiosyncratic Risk ......Page 295
A Qualification ......Page 296
Investment Insights ......Page 297
18. Diversification: When More Is Less ......Page 300
Investment Insights ......Page 304
19. Robin Hood Investing ......Page 306
A New Test ......Page 309
Why Rebalancing Works ......Page 313
A Clarification ......Page 314
Investment Insights ......Page 315
20. Is High Volatility Always Bad? ......Page 318
Investment Insights ......Page 322
The Problem with Portfolio Optimization ......Page 324
Eight Principles of Portfolio Construction ......Page 328
Correlation Matrix ......Page 332
Going Beyond Correlation ......Page 333
Investment Insights ......Page 336
Epilogue: 32 Investment Observations ......Page 338
Appendix A: Options—Understanding the Basics ......Page 342
Sharpe Ratio ......Page 346
Sortino Ratio ......Page 347
Symmetric Downside-Risk Sharpe Ratio ......Page 348
MAR and Calmar Ratios ......Page 349
Return Retracement Ratio ......Page 350
Acknowledgments ......Page 352
About the Author ......Page 354
Index ......Page 356
Dustwrapper - rear ......Page 368