A Decade of DelusionsFrom Speculative Contagion to the Great Recession
The proven strategies rational investors require for success in an irrational market When the dot-com and real estate bubbles of the 1990s and 2000s burst, few were spared the financial fallout. So, how did an investment advisory firm located in Elkhart, Indiana—one of the cities hit hardest by the economic downturns—not only survive, but also thrive during the highly contagious speculative pandemics. By remaining rational. In A Decade of Delusions: From Speculative Contagion to the Great Recession, Frank Martin founder of Elkhart, Indiana's Martin Capital Management offers a riveting and real-time insider's look at the two bubbles, and reflects on how investors can remain rational even when markets are anything but. Outlines strategies the average investor can use to wade through the endless news, information, and investment advice that bombards them Describes the epidemic of market speculation that gradually infects feverish investors Details how investors can spare themselves the emotional devastation and accompanying paralysis resulting from shocking financial losses Investors are still reeling from the instability in the market. A Decade of Delusions: From Speculative Contagion to the Great Recession provides the information investors need to achieve safety, liquidity, and yield.
Foreword xi Preface xvii Chapter 1 Lead Us Not into Temptation 1 May Reason Prevail 2 Patience and Persistence 6 The Dean of Wall Street Revisited 12 The Investor’s Dilemma 19 It’s a Numbers Game 20 The Supremacy of Earnings 22 “Stealth Compensation” 36 Conclusion 42 Chapter 2 Techno Babble, Techno Bubble 43 A Tale of Two Markets 45 Back to the Future? 53 Warren Buffett on the Stock Market 58 Is the Internet the Answer? 65 What’s a Long-Term Investor to Do? 68 Investment Redefi ned 69 Chapter 3 “Pop!!”.com 75 Risk: No Longer an Afterthought 76 Investment Strategy: Is It Time for Technology? 83 Is There a Snowball Rolling Our Way, Gathering Mass and Speed? 87 The Art/Science of Managing Risk 88 Baby Boomers: Whither Goest Thou? 99 The Internet and IPO Frenzy 100 Fool’s Gold 101 Goliaths Slain 102 Chapter 4 Swimming against the Current 113 Prelude to Our Investment “Strategy” 116 Interest Rates: It Had Better Be Uphill from Here 127 The Power of Popular Delusions 131 The Mind of Crowds 139 Investment Consultants: The Great Middleman Myth 142 Chapter 5 The “Greenspan Put” . . . Again 145 Investment Strategy 146 The Reckoning 149 Sober in the Morning 151 Micro versus Macro 151 The Margin-of-Safety Paradox 153 Waiting Patiently for Those Hanging Curves 154 Chapter 6 Only Fools Rush In 159 The Rogues Gallery, 2003 Vintage 160 Making Progress in the Post-Bubble Environment 164 How Did We Get Here in the First Place? 171 The Apogee of the Mutual-Fund Boom 181 The Great Abdication of Fiduciary Responsibility: The Defined-Contribution Plan 188 Where the Buck Really Stops 192 Chapter 7 Expanding Concern: A Bigger Bubble? 197 Maybe the Markets Are Not Random? 200 A Short History of Financial Euphoria 218 Fully Deluded Earnings: Penance (?) in the Cuff-Links Cooler 222Run for the Roses: Of Pawns, Guinea Pigs . . . and “Retail Investors” 231 “Swing, You Bum!” 242 Marathon Endurance 247 Chapter 8 What History Teaches 253 Free Markets: Popular Delusions and the Madness of Crowds 254 Aspiring to Rationality by Overcoming Heuristic Biases 257 Today Is Not Tomorrow: Cycles and Differing “Opportunity Sets” 259 Inverting the Traditional High-Risk/High-Return Paradigm 260 The Inevitability of Regression to the Mean 261 There Are No Called Strikes in the Investment Ballgame 263 Focus on the Important 264 The Malevolent Mathematical Mystery of Modern Money Management (a.k.a. MPT) 264 The Absurdity of the Collective Wisdom of Individual Irrationality 265 Diversification and the Myth of Safety in Numbers 266 The New-Era Error 268 Chapter 9 Contagious Speculation 269 The Means to the End 271 The Perfect Storm? Viewing the Vista through the Lens of History 272 The Blossoming of the Financial Economy: The Cataclysm in the Creation of Credit 281 Bubbles Are Indigenous to the Financial Economy 299 If Housing Prices Roll Over 306 A Remarkable Story of Risk Management—Run Amok 310 The Perfect Storm Redux 325 Capitalism: When “Financial” Overwhelms “Commercial” 329 Minsky: A Prequel? 332 The Evolving History of Economics and Finance: Reflections 334 Chapter 10 The Tipping Point 339 Excerpt from Quarterly Capital Markets Review, July 2007 341 Draft of Letter to MCM Clients, July 2007 342 Quarterly Capital Markets Review, October 2007: “What’s Up, Doc?” 348 Cyclical or Secular? The Current Crisis in the Larger Context of Cause and Effect—Connecting theDots through Time 350 The Misalignment of Incentives and the Opaque World of High Finance 352 Edging toward the Precipice 360 The “Simple” Question Why? 362 An Early Epitaph for the First Decade of the New Millennium 363 Credit-Default Swap Alchemy: Transmuting Junk into Gold 371 Counterparty Risk 376 Chapter 11 The End or the Beginning? 381 Origins of a Crisis: Decoupling Risk and Return 384 The Question on Which the Future of Investment Hangs 388 The Stockdale Paradox: What Do Survivors Have in Common? 389 Know Thyself 390 Harsh Realities and the Snowball Effect 394 The Future of Risk Aversion 400 Price Is What You Pay, Value Is What You Get 404 The Lost Decade 407 The Most Powerful Force in the Universe 409 Value Investors: A Rare Breed 411 Risk—Once Again a Four-Letter Word? 413 Analysis and Intuition: The Yin and Yang 416 Epilogue “This Time Is Different” 427 Those Who Don’t Remember History . . . 428 The Insidious Disappearance of Accountability 430 The Intersection of the Philosophical and the Pragmatic 432 Respect for Risk . . . Just for a Fleeting Moment 433 Index 437
Frank K. Martin, CFA, founded Martin Capital Management in 1987 after twenty years of experience in municipal finance and, later, mergers and acquisitions. Martin's post-secondary degrees are from Northwestern University and Indiana University. He resides in northern Indiana with his wife, Marsha. He has three adult children. Additional biographical information can be found at www.mcmadvisors.com.
In the current volatile and irrational financial climate, intelligent investors are looking for sound advice and proven strategies to protect their money and grow it safely. Drawn from annual reports and other communiqués with investors during the most turbulent period of U.S. economic history since the 1930s, A Decade of Delusions: From Speculative Contagion to the Great Recession offers a glimpse into the real-time thought process of a successful investment manager. Incorporating the wisdom of philosophers, psychologists, economists, and financial managers past and present, the book offers thoughtful and thorough essays on how to assess what may lie ahead for investors—and how to best prepare for it. Accessible and comprehensive, A Decade of Delusions is a true insider's account, accented with the genuine suspense that only the weighty responsibility of real-life money management can provide. Writing in a colloquial, conversational style, Frank Martin, founder of Martin Capital Management, in Elkhart, Indiana, offers a rare opportunity to peer inside the mind of an investment manager who saw trouble ahead when others could not: the tech stocks bubble and the sub-prime mortgage bust, to name a couple. This is the documented account of how Frank Martin navigated his clients through a torrent of near catastrophes in the "Lost Decade." In the process, he provides invaluable perspective, helping the average investor steer clear of danger in these difficult waters. A practical how-to guide, it is also a comprehensive history of some of the world's most brilliant economic thinkers through the ages. Outlining strategies to remain fiercely independent of the delusional madness that often grips the markets, describing in detail the epidemic speculation that can topple financial systems, and explaining how investors can spare themselves the devastation of major and permanent financial loss, A Decade of Delusions is an essential reference for all those looking to protect and maximize the potential of their investment capital.
NAVIGATING THE FINANCIAL WHIRLWIND—WITH HELP FROM THOSE WHO'VE BEEN THERE "Frank Martin is a great value investor and an engaging writer. A Decade of Delusions contains his real-time commentaries from the dot-com mania through to the subprime crisis. Anyone interested in investment should buy a copy."—Edward Chancellor, author, Devil Take the Hindmost: A History of Financial Speculation "Frank Martin, ace value investor, walked the walk. Now, he talks the talk. A fine and bracing read!"—James Grant, Grant's Interest Rate Observer "By updating and extending his excellent Speculative Contagion, Frank Martin has demonstrated the enduring power of the value-based approach. These dispatches from the front line of investing during the delusional decade provide many insights into both the process and discipline needed to do the right thing."—James Montier, author, Value Investing: Tools and Techniques for Intelligent Investment When the dot-com and real estate bubbles burst, few investors were spared acute financial pain. So, how did an investment advisory firm located in Elkhart, Indiana—one of the cities hardest hit by the 2008 economic downturn—not only survive, but thrive amid the madness of speculative markets? By remaining rational. In A Decade of Delusions: From Speculative Contagion to the Great Recession, renowned investment manager Frank Martin shares, through real-time client communiqués and essays, how he steered his investors' capital through economic turmoil as the markets lurched from boom to bubble to bust and back again. His account serves as an eye-opening example of how keeping your money starts with keeping your head. As investors continue to grapple with ongoing market instability, the book offers helpful guidance on how you can assess risk, safeguard your capital, and grow your investments over time. After mastering the strategies outlined in these pages, you will be ready to face the future with confidence, no matter what might be in store.
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