1.Past, present and even discounted future events are reflected in market price, but often show no apparent relation to price changes……[A]rtificial causes also intervene: the Exchange reacts to itself, and the current fluctuations is a function, not only of the previous fluctuations, but also of the current state. The determination of these fluctuations depend on an infinite number of factors; it is, therefore, impossible to aspire to mathematical predictions of it……[T]he dynamics of the exchange will never be an exact science.

-         Louis Bachelier.

2. A person watching the tide coming in and who wishes to know the exact spot which marks the high tide, sets a stick in the sands at the points reached by the incoming waves until the stick reaches the position where the waves do not come up to it, and finally recede enough to show that the tide has turned.

This method holds good in watching and determining the flood tide of the stock market……The price waves, like those of the sea, do not recede at once from the top. The force which moves them checks the inflow gradually and time elapses before it can be told with certainty whether the tide has been seen or not.

  -         Dow

3. The riskiness  of a portfolio depends on the covariance of its holdings, not on the average riskiness of the separate investments.

 - Harry Markowitz.

4. My ventures are not in one bottom trusted,
Nor to one place; nor in my whole estate
Upon the fortune of this present year;
Therefore my merchandise makes me not sad.

 -   Antonio in the play "Merchant of Venice" by William Shakespeare.

5. The Markowitzian process of selecting securities for the most efficient risky portfolio is completely separate from the decision of how to divide up the total portfolio between risky and risk-free assets.

 - James Tobin

6. The returns on most securities are correlated. If the Standard and Poor Index rose substantially, we would expect United States Steel (Common) to rise. If the Standard & Poor Index rose substantially, we would also expect Sweets Company of America (Common) to rise. For this reason, it is more than likely that the United States Steel will do well when Sweets Company do well.

 -   Harry Markowitz.

7. It is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe that the market will value it at 20 three months hence........Human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by an average man at a very high rate.

It is, so to speak, a game of Snap, of Old Maid, of Musical Chairs - a past time in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbor before the game is over, who secures a chair for himself when the music stops.

 - John Maynard Keynes 

8. Noise trading provides the missing ingredient.

 - Fisher Black

9. If there are may analysts who are pretty good at this sort of thing......they help narrow discrepancies between actual prices and intrinsic values and cause actual prices, on the average, to adjust "instantaneously" to changes in intrinsic values.......Although the returns to these sophisticated analysts may be quite high, they establish a market in which fundamental analysis is a fairly useless procedure both for the average analyst and the average investor.

 - Eugene Fama

10. Stock prices in a well-functioning and competitive market will reflect predictions based on all relevant and available information......seems almost trivially self- evident to most professional economists - so much so, that testing seems rather silly. On the other hand, the idea seems truly revolutionary to the traditional security analyst. Only the most exhaustive testing could possibly convince some diehard practitioners of the merits of the approach. Interestingly, professional economists seem to think more highly of professional investors than do other professional investors.

 - William Sharpe

11. The chartist must admit that the evidence in favor of the random walk model is both consistent and voluminous, whereas there is precious little published in discussion of rigorous empirical tests of the various technical theories. If the chartists rejects the evidence of the random walk model, his position is weak if his own theories have not been subjected to equally rigorous. This, I believe, is the challenge that the random walk theory makes.

 - Eugene Fama

12. A cow for her milk,
A hen for her eggs,
And a stock,  by heck,
For her Dividends.

 - Williams

13. [W]e shall contend that there is no important evidence against the [efficient market] hypothesis in the weak and semi-strong form tests.......and only limited evidence against the hypothesis in the strong form tests (i.e. monopolistic access to information about prices does not seem to be a prevalent phenomenon in the investment community.

 - Eugene Fama

14. [G]rowth stocks seem to represent the ultimate in difficulty of evaluation. The very fact that the Petersburg Problem has not yielded a unique and generally acceptable solution to more than 200 years of attack by some of the world's greatest intellects suggests, indeed, that the growth-stock problem offers no great hope of a satisfactory solution.

 - David Durand.

15. The real accomplishment of the many thousand analysts now studying not so many thousand companies is the establishment of proper relative prices in today's market for most of the leading issues and a great many secondary ones.

.....[I]nsofar as stock prices are relatively "right" on the basis of known and foreseeable facts, the opportunities for consistently above-average results must necessarily diminish.

.....[R]elative market prices already reflect pretty well those facts and expectations on which really on analysts would agree.

 - Graham and Dodd

16. Clearly, if a single individual or a single institutional investor owned all the bonds, stocks and warrants issued by a corporation, it would not matter to this investor what the company's capitalization was......To such an individual it would be perfectly obvious that total interest - and dividend-paying power was in no wise dependent on the kind of securities issued to the company's owners.

 - John Burr 

17. The market value of any firm is independent of its capital structure.

 - Modigliani & Miller

18. When beggars and shoeshine boys, barbers and beauticians can tell you how to get rich, it is time to remind yourself that there is no more dangerous illusion than the belief that one can get something for nothing.

 - Bernard Baruch, on the 1929 crash, Baruch: My Own Story.

19. What is a cynic? A man who knows the price of everything, and the value of nothing.

 - Oscar Wilde, Lady Windermere's Fan

20. On the average, information moves so fast that the market as a whole knows more than any individual investor can know.

 - Eugene Fama

21. It is not ordered in heaven, or by the second law of thermodynamics, that a small group of intelligent and informed investors cannot systematically achieve higher mean portfolio gains with lower average variabilities. People differ in their heights, pulchritude, and acidity. Why not in their P.Q. or performance quotient?

 - Paul Samuelson.

22. Watch smart people. You want to be buying what they are buying. You never want to be selling what they are buying. You don't want to be on the other side of a trade with people like that.

 - Michael Price

25. The problem with street research is its agenda. Its investment banking agenda-ed. It's not very innovative, but it is very informative. We read street research for background and to understand consensus, because consensus is reflected in the price of the stock.

 - Laura J. Sloate

26. If you look a ten companies you will find one that's interesting. If you look at 20, you'll find two; if you look at 100, you'll find ten. The person that turns over the most rocks wins the game.

 - Peter Lynch

27. There are five things that I specifically look for in stocks and a sixth kind of overview theme if I can get it. One, I want dramatically accelerated earnings. Second, I want a strong balance sheet. Third, I want a strong relative price strength. Fourth, I want companies in industries that are doing well in the market price wise. Fifth is low institutional ownership. Sixth, we like to focus on dominant investment themes - the dynamic trends we identify early.

 - Scott Sterling Johnston

28. It's true that growth stocks vary together, and it's true that value stocks vary together. In other words, their returns tend to vary together which means that there is a common element of risk there. Now, for growth stocks that seems to be a risk that people are willing to bear at a lesser return than the return they require for the market as a whole. Whereas, if I look at the value stocks, which we also call distressed stocks, their returns vary together, but people aren't willing to hold those except at a premium to market returns.

 - Eugene Fama

29. There are at least three dimensions of risk: market risk, small stock versus big stock risk, and distress stock versus growth stock risk.

 - Eugene Fama

30. Small companies seem to be similar to value companies in that, on average, they are going to have future earnings problems. That's a source of risk. The market doesn't like that. So, small stocks and value stocks seem to be associated with higher rates of return. But it's really a cost of capital question. The value companies are struggling, and because they have this type of risk, they have to pay more for equity capital. The high cost of capital for the firm means a high return for the investor. Investors should not look on that as a free lunch. They are simply getting compensated for risk that they are bearing.

- Rex Sinquefield

31. There are three elements to our sell decision. The first is the notion that stocks do become over-owned, over loved, even-adored. When you invest the way we do, you can reach a condition where popularity breeds a crowd. Then the stocks become so successful that everybody owns them and loves them. When we sense that happening, it's time to move on.

 - Van Schreiber

32. The other thing I'd say is, it has gotten easier to beat the market, not harder, over the last five years. The reason is that, in some sense, the market has gotten more irrational and random. There are a lot of new players out there, especially on the momentum side, who create great disparities and huge volatility in the market. Those become opportunities. From volatility emerges opportunity. If you have information that other people don't have, that is a reason for outperforming. It's not necessarily inside information or non-public information; some of this information involves the experience level of the person who has dealt with the investments before, as well all the research that that person may or may not be doing.

 - John Ballen

33. Stay away from activities that are unfamiliar to you and will continue to be unfamiliar to you. That's the first level of advice. The second level is that by the time a company has its highest level of recognition and popularity, you can be pretty darn sure that the market valuation has run well in excess of the intrinsic value of the company. It's that well-known and that well-liked.

 - Roger F. Murray

34. An acceleration in the earnings growth rate will often lead to excess market returns.

 - Robert B. Gillam

35. Then, if somebody comes along and says, "I'm really great at growth stocks. I can tell the good ones and the bad ones," I might say fine, you've convinced me. I want you to go long the ones you think are really good and short the ones you think are really bad. That means that, net-net, you bring me no exposure to growth stocks, or any other stocks. Basically, what you're bringing to me is T-Bills plus, we hope, something in addition.

 - William F. Sharpe

36. Black and Scholes developed a formula which priced options as a function of observables. By observables, I mean that the warranted option price is a function of the strike price, the price of the underlying security, the interest rate, the time to maturity, and the volatility of the underlying security. The only thing that isn't directly observable is the volatility, but that can be very closely approximated. Much better to approximate the volatility of something than the mean expected return, which is what stock pickers have to do.

 - Merton Miller

37. The essence of the efficient market thing is, after all, as we in economics have always held: There's no free lunch. You can't just sit back in your office scanning the newspapers, reading research reports, and listening to "Wall Street Week", and hope to earn above-normal rates of return. To beat the market you'll have to invest serious bucks to dig up information no one else has yet.

 - Merton Miller

38. I agree with the efficient market theorists up to a point, but I will give you a prime example that occurs almost everyday where the theory doesn't always work - that's new issues. The public perception of new issues is quite high. But what happens if an issue falls by the wayside very quickly? That could be the result of a number of factors, particularly if you are bringing out a new issue when the market is near a top. They come out, they get caught up in the general market, and they get lost. That's when the inefficiency comes into play. These issues are quickly forgotten by the public because the public is focused on the overall market.

 - Eric Ryback

39. f you are after companies with great exciting products that are growing three or four times the rate of the market, with big expectations, you are going to have disappointments. Small companies are prone to erratic earnings swings. It's the nature of the beast. They are about discovery. They are under-owned, under-followed, thinly-capitalized, and subject to big moves when institutions find out about them. Conversely, when something goes wrong, most everyone rushes to get out the doorway at the same time. Need I remind you that it's a very narrow passageway? Higher risk equates to higher returns.

 - Scott Sterling Johnson

40. What it takes to get Bill Sharpe to recommend entrusting money to an active manager?

Sharpe: First of all, I want a very well-defined product. I want a product to be defined relative to a benchmark. I want that benchmark very explicit. It can be a combination of standard benchmarks. In most cases it makes sense for it to be. But I want the manager to say, for example, we will manage relative to 60% this index and 40% that index. That's the benchmark. And we will control the process so that the difference between us and that benchmark will remain within bounds. And I want those bounds to be reasonably tight. The basic idea is, I want to know what it is they're doing and the benchmark, or a combination thereof, is a good way to focus on that. I want to know that they're controlling the process, so we are not taking wild bets. Then, I want to hear an awful lot about what the process is that leads to the risk they do take.

 - William F. Sharpe

41. Markets have many participants, whose views are bound to differ. I shall assume that many of the individual biases cancel each other out, leaving what I call the "prevailing bias". In stock market the participants' bias finds expression in purchases and sales. Other things being equal, a positive bias leads to rising stock prices and a negative one to falling prices. Thus the prevailing bias is an observable phenomenon. Other things are, of course, never equal. We need to know a little more about those "other things" in order to build our model. At this point, I shall introduce the second simplifying concept. I shall postulate an "underlying trend" that influences the movement of stock prices whether it is recognized by investors or not. The influence on stock prices will, of course, vary, depending on the market participants' views. The trend in stock prices can then be envisioned as a composite of the "underlying trend" and the "prevailing bias"

- George Soros

42. All is flux, nothing stays still. Nothing endures but change.

 - Heraclitus

43. First, we must start with some definitions. When stock prices reinforce the underlying trend, we shall call the trend self-reinforcing; when they work in the opposite direction, self correcting. The same terminology holds for the prevailing bias: it can be self-reinforcing or self-correcting. It is important to realize what these terms mean. When a trend is reinforced, it accelerates. When the bias is reinforced, the divergence between expectations and the actual course of future stock prices gets wider and, conversely, when it is self correcting, the divergence gets narrower. As far as stock prices are concerned, we shall describe them simply as rising and falling. When the prevailing bias helps to raise prices, we shall call it positive; when it works in the opposite direction, negative. Thus rising prices are reinforced by a positive bias and falling prices by a negative one. In a boom/bust sequence, we would expect to find at least one stretch where rising prices are reinforced by a positive bias and another where falling prices are reinforced by a negative bias. There must also be a point where the underlying trend and the prevailing bias combine to reverse the trend in stock prices.

 - George Soros

44. Let us now try to build a rudimentary model of boom and bust. We start with an underlying trend that is not yet recognized - although a prevailing bias that is not yet reflected in stock prices is also conceivable. Thus, the prevailing bias is negative to start with. When the market participants recognize the trend, this change in perceptions will affect stock prices. The change in stock prices may or may not affect the underlying trend. In the latter case, there is little more to discuss. In the former case, we have the beginning of a self-reinforcing process.

The enhanced trend will affect the prevailing bias in one or two ways: it will lead to the expectation of further acceleration or to the expectation of a correction. In the latter case, the underlying trend may or may not survive the correction in stock prices. In the former case, a positive bias develops causing a further rise in stock prices and a further acceleration in the underlying trend. As long as the bias of self-reinforcing, expectations rise even faster than stock prices. The underlying trend becomes increasingly influenced by stock prices and the rise in stock prices becomes increasingly dependent on the prevailing bias, so that both the underlying trend and the prevailing bias becomes increasingly vulnerable. Eventually, the trend in prices cannot sustain prevailing expectations and a correction sets in. Disappointed expectations have a negative effect on stock prices, and faltering stock prices weaken the underlying trend. If the underlying trend has become overly dependent on stock prices, the correction may turn into a total reversal. In that case, stock prices fall, the underlying trend is reversed, the expectations fall even further. In this way, a self reinforcing process gets started in the opposite direction. Eventually, the downturn also reaches a climax and a reverse itself.

 - George Soros

45. The key to winning consistently over a long period in this business is to constantly keep the odds in your favor. Suppose you are sitting at the right side of the dealer in a five-card draw poker game with a $10 ante, there is $50 in the pot after the deal. If the first player bets $10 and everyone else calls, then there is $90 to be won if you call and win. The potential reward at this point is 9 to 1. Assuming you have four hearts and want to draw a flush ( a probable winning hand), the odds are 5.2 to 1 of drawing a heart. With a risk of 4^1/2 to 1 and a reward of 9 to 1, the odds are clearly1.7 to 1 in your favor. Over the long term, if you maintain this kind of strategy, you will win twice what you will lose. Of course, if you pull a flush on the draw, you will then have to make another bet which will be based on your reading of the  other players and your assessment of their behavior. But to win over the long term, you must limit your losses and stay at the table.

- Victor Sperandeo 

46. Non diversifiable risk is a measure of how a security's return is affected by factors common to all securities. The impact of these factors on a portfolio cannot be avoided, since they are common to all securities in the portfolio. For this reason, other names for non diversifiable risk are market risk or systematic risk.

Diversifiable risk or unsystematic risk is the unique risk associated with an individual security. Examples of this risk include a strike or major litigation that will adversely impact the profit potential of the firm. The risk can be avoided by holding a diversified portfolio of securities. Empirical studies using randomly generated stock portfolios have shown that, by holding a portfolio of about 10 to 12 different stocks, an investor can diversify away virtually all unsystematic risk. Therefore, the only risk present in a well-diversified portfolio is non-diversifiable or market risk. It is only this risk that investors should be compensated for accepting. 

47. Expected Return = risk-free rate + beta * [expected market return-risk-free rate]

The above relationship is referred to as the capital asset pricing model (CAPM) and states that the expected return from a security should equal the risk-free rate of return plus a risk premium.

48. Arbitrage Pricing Theory allows for more than one factor that systematically affects the price of all securities. Investors want to be compensated for accepting each of these different systematic factors. Mathematically, APT can be expressed as follows when there are k systematic factors:

Expected Return  = risk-free rate

                            + beta₁ * [risk premium for factor 1]

                            + beta₂ * [risk premium for factor 2]

                            + ................

                            + beta_k * [risk premium for factor k]

49. Pricing efficiency refers to a market in which prices at all times fully reflect all available information that is relevant to the valuation of securities.

50. Weak efficiency means that the price of the security fully reflects price and trading history of the security. Semistrong efficiency means that the price of the security fully reflects all public information (which, of course, includes historical price and trading patterns). Strong efficiency exists in a market in which the price of a security reflects all information regardless of whether or not it is publicly available.

51. The maximum amount that an option buyer can lose is the option price. The maximum profit that the option writer (seller) can realize is the option price. The option buyer has substantial upside return potential while the option writer has substantial downside risk.

52. Position Traders would search for disparities in option pricing and then create an arbitrage between one or more option classes and the underlying stock or futures contract. An arbitrage is a position established to exploit a mispriced option/stock/index/future relationship. The position trader sought to capture some theoretical edge as the relation-ship moved back to its real value. These positions were quite often costly to carry, moreover, the key was not only the position trader's ability to finance this cost, but his skill in managing the risk. Although, not an absolute, a general rule of thumb is that the more difficult the arbitrage, the greater the profit potential.

 - Jon Najarian

53. Fortunately, however, shareholders whose personal stake is too small to justify costly monitoring of management have another well-tested way to protect their savings from management's mistakes of omission or commission: diversify! A properly diversified shareholders would have the satisfaction of knowing that his or her loss on IBM shares or Sears or General Motors was not even a private loss since it was offset in the portfolio by gains on Microsoft, Intel, Apple, WalMart and other new-entrant firms, foreign or domestic, that did pioneer in the new technologies.

 - Merton Miller

54. The stock market is generally believed to anticipate recessions; it would be more correct to say that it can help to precipitate them. Thus I replace the assertion that markets are always right with two others:

1. Markets are always biased in one direction or another.

2. Markets can influence the events that they anticipate.

The combination of these two assertions explains why markets may so often appear to anticipate events correctly.

 - George Soros

55. Holding aside the pure speculative uses of options and futures, listed below are some of the investment management applications of options and futures.

1. They may be used to create a synthetic instrument that offers a higher return than a cash market instrument or an index.

2. Options and futures can be used to adjust the risk exposure of a stock or bond portfolio quickly. For a stock portfolio, this means adjusting the beta of the portfolio. For a bond portfolio, this means adjusting the duration of the portfolio. In the special case where an investment manager wants to hedge the portfolio, this means adjusting the beta of a stock portfolio or the duration of a bond portfolio to zero.

3. Options and Futures can be used for asset allocation to alter the stock/bond mix of a portfolio quickly.

4. Futures contracts can be used to reduce the transaction costs of creating an index fund.

56. ASSET ALLOCATION IMPLEMENTATION - ADVANTAGES OF FUTURES

• Transaction costs minimized.
• Excellent liquidity; rapid execution.
• One day settlement; simultaneous trades.
• Does not disrupt management of underlying assets.
• Stabilizes portfolio income stream.
• Potential for favorable mispricing.

57. The crowning achievement of the axiomatic approach is the theory of perfect competition. The theory holds that under certain specified circumstances the unrestrained pursuit of self-interest leads to the optimum allocation of resources. The equilibrium point is reached when each firm produces at a level where its marginal cost equals the market price and each consumer buys an amount whose marginal "utility " equals the market price.

The demand and supply curves should be taken as given. The shape of the supply and demand curves cannot be taken as independently given, because both of them incorporate the participants' expectations about events that are shaped by their own expectations. Nowhere is the role of expectations more clearly visible than in financial markets. Buy and sell decisions are based on expectations about future prices, and future prices, in turn, are contingent on present buy and sell decisions.

 - George Soros

58. HEDGING AND RISK MANAGEMENT

The implications of our framework for hedging and risk-management decisions are straight forward/ Exposures to broad market risk - such as stock market risk, interest rate risk, or foreign exchange risk - usually can be hedged with derivatives such as futures, forwards, swaps and options. By definition, hedging away these risk exposure reduce asset risk. Thus, hedging market exposure reduces the required amount of risk capital

Firms that speculate on the direction of the market, and therefore maintain a market exposure, will require more risk capital. By purchasing put options to insure against these market risks, the firm can maintained its desired exposures with the least amount of risk capital.

 - Merton and Perold

59. THE RELIABILITY OF RATINGS

In this section, we review the rating agencies' historical records in measuring relative and absolute risks of corporate bond defaults. Many of the current uses of ratings presume accuracy on both counts. To be meaningful, ratings must, at a minimum, provide a reasonable rank-ordering of relative credit risks. In addition, however, ratings ought to provide a reliable guide to absolute credit-risk. In other words, the ratings levels corresponding to regulatory cutoffs should have a fairly  stable relationship to default probabilities over time. Our review of the corporate bond defaults data assembled by Moody's and Standard and Poor's suggest that the agencies do a reasonable job of assessing relative credit risks: lower rated bonds do in fact tend to default more frequently than higher rated bonds. Agency ratings have been a less reliable guide, however, to absolute credit risks: default probabilities associated with specific letter ratings have drifted over time.

 - Cantor and Packer

60. WHY ARE NEW ISSUES UNDERPRICED?

Several reasons have been proposed in the institutional, finance, and economic literature as to why underpricing occurs. Although this article will not discuss all the proposed reasons, it concentrates on four views that have received much publicity. The first view attributes underpricing to "monopoly power" enjoyed by investment bankers. The second regards Securities and Exchange Commission regulations as the primary cause. And the third and fourth see underpricing as a problem of imperfect information among contracting parties - especially between investors and issuers.

 - Saunders

61.           The Information Content of Dividends

But, as we suggested in our 1961 paper, these price reactions to dividend announcements were not really refutations. They were better seen as failures of one of the key assumptions of both the leverage and dividend models, viz. that all capital market participants, inside managers and outside investors alike, have the same information about the firm's cash flows. Over long enough time horizons, this all-cards-on-the-table assumption might, we noted, be an entirely acceptable approximation, particularly in a market subject to S.E.C. disclosure rules. But new information is always coming in; and in over shorter runs, the firm's inside managers were likely to have information about the firm's prospects not yet known to or fully appreciated by the investing public at large. Management-initiated action on dividends or other financial transactions might then serve, by implication, to convey to the outside market information not yet incorporated in the price of the firm's securities.

 - Merton H. Miller

62. Anyone buying or selling should normally think that there has to be someone rational on the other end of the transaction. At any sustainable price there have to be a tenable cases of selling and buying. If selling a share, a Picasso or even a house, there ought to be room for the next owner to make a profit, or at least get a good deal. If there is not, the price is about to fall.

Too often, towards the end of a boom, the only reason for buying is that everyone else is. The share has momentum; the hedge funds are in or there is a shortage of stock. When that is the case, investors should leave it to the speculators and head for the exit.

Source: Personal Investor (TIMES ONLINE)

63. In effect, our shareholders behave in respect of their Berkshire stock much as Berkshire itself behaves in respect to companies in which it has an investment. As owners of say, Coca-Cola or Gillette shares, we think of Berkshire as being a non-managing partner in two extraordinary businesses, in which we measure our success by the long-term progress of the companies rather than by the month-to-month movement of the stock. In fact, we would not care in the least if several years went by in which there was no trading, or quotation of prices, in the stocks of those companies. If we have  good-term expectations, short-term price changes are meaningless for us except to the extent they offer us an opportunity to increase our ownership at an attractive price.

 - Warren Buffet

64.In line with Berkshire's owner-orientation, most of our directors have a major portion of their net worth invested in the company. We eat our own cooking.

 - Warren Buffet

65. Our long-term economic goal (subject to some qualifications mentioned later) is to maximize Berkshire's average annual rate of gain in intrinsic business value on a per-share basis. We do not measure the  significance or performance of Berkshire by its size, we measure by per-share progress.

 - Warren Buffet

66. Overall, Berkshire and its long-term shareholders benefit from a sinking stock market much as a regular purchaser of food benefits from declining food prices. So when the market plummets - as it will from time to time - neither panic nor mourn. It's good news for Berkshire.

 - Warren Buffet

67. Because of our two-pronged approach to business ownership and because of the limitations of conventional accounting, consolidated reported earnings may reveal relatively little about our true economic performance. Charlie and I, both as owners and managers, virtually ignore such consolidated numbers. However, we will also report to you the earnings of each major business we control, numbers we consider of great importance.

 - Warren Buffet

68. Accounting consequences do nit influence our operating or capital-allocation decisions. When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable.

In aggregate and over time, we expect the unreported earnings to be fully reflected in our intrinsic business value through capital gains.

 - Warren Buffet.

69. We use debt sparingly and, when we do borrow, we attempt to structure our loans on a long-term fixed-rate basis. We will reject interesting opportunities rather than over-leverage our balance sheet. This conservatism has penalized our results but it the only behavior that leaves us comfortable, considering our fiduciary obligations to policyholders, lenders and the many equity holders who have committed unusually large portions of their net worth to our care. (As one of the Indianapolis 500 winners said: To finish first, you must first finish.)

 - Warren Buffet

70. Despite our policy of candor we will discuss our activities in marketable securities only to the extent legally required. Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or business acquisitions ideas are. Therefore, we normally will not talk about our investment ideas.

 - Warren Buffet

71. To the extent possible, we would like each Berkshire shareholder to record a gain or loss in market value during his period of ownership that is proportional to the gain or loss in per-share intrinsic value recorded by the company during that holding period. For this to come about, the relationship between the intrinsic value and the market price of a Berkshire share would need to remain constant, and by our preferences at 1-to-1. As this implies, we would rather see Berkshire's stock price at a fair level than a high level.

 - Warren Buffet

72. Paul Krugman on financial crises

"Everyone is familiar with the way that a speculative bubble can develop in a financial market. Investors, for whatever reason, come to take a more favorable view of the prospects for some traded asset. This leads to a rise in the asset's price. If investors then interpret this gain as a trend rather than a one-time event, they become still more anxious to buy the asset, leading to a further rise, and so on. In principle, long-sighted investors are supposed to prevent such speculative bubbles by selling assets that have become overpriced or buying them when they have become obviously cheap. Sometimes, however, markets lose sight of the long run, especially when the long run is complex or obscure. Thus speculative bubbles in soybean futures tend to be limited by a common knowledge that a lot more soybeans will be grown if the price gets very high. But the chain of events that must eventually end a speculative bubble in, say, the mark - an overvalued mark reduces German exports, leading to a weak German economy, so the Bundesbank reduces interest rates, making it unattractive to hold mark-denominated assets - is often too long and abstract to seem compelling to investors when the herd is running."

73. We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value of each $1 retained. 

If we reach the point that we can't create extra value by retaining earnings, we will pay the out and let our shareholder deploy the funds.

 - Warren Buffet

74. Managements that say or imply during a public offering that their stock is undervalued are usually being economical with the truth or uneconomical with their existing shareholders' money: Owners unfairly lose if their managers deliberately sell assets at 80¢ that are in fact are worth $1.

 - Warren Buffet

75. Founding-Family Ownership and Firm Performance: Evidence from the S&P 500

We investigate the relation between founding-family ownership and firm performance. We find that family ownership is both prevalent and substantial, families are present in one-third of the S&P 500 and account for 18 percent of outstanding equity. Contrary to our conjecture, we find family firms perform better than non family firms. Additional analysis reveals that the relation between family holdings and firm performance is non linear and that when family members serve as CEO, performance is better than with outside CEOs. Overall, our results are inconsistent with the hypothesis that minority shareholders are adversely affected by family ownership, suggesting that family ownership is an effective organizational structure.

 - Ronald C. Anderson
 - David M. Reeb

76. Rumors

An informed investor with limited investment capacity spreads imprecise rumors to an audience of followers. Followers trade on the advice and move the price. Due to the imprecision of the rumor, the price overshoots with positive probability. This gives the rumormonger the opportunity to trade twice: First when she receives information, then when she knows the price to be overshooting. In equilibrium, rumors are informative and both rumormongers and followers increase their profits at the expense of uninformed liquidity traders.

 - Jos Van Bommel

77. Does Shareholder Composition Matter? Evidence from the Market Reaction to Corporate Earnings Announcements.

We examine whether institutional ownership composition is related to parameters of the market reaction to negative earnings announcements. When firms report earnings below analysts' expectations, the stock price response is more negative for firms with higher levels of ownership by momentum or aggressive growth investors. There is no evidence, however, that these institutions cause an "overreaction" to earnings news. Ownership structure is also related to trading volumes and to stock price volatility on days around earnings announcements. Our findings are consistent wit the idea that the composition of institutional shareholders effects stock price behavior around the release of corporate information.

- Edith S. Hotchkiss
 - Deon Strickland

78. Momentum and Reversals in Equity-Index Returns During Periods of Abnormal Turnover and Return Dispersion

We document new patterns in the dynamics between stock returns and trading volume. Specifically, we find substantial momentum (reversals) in consecutive weekly returns when the latter week has unexpectedly high (low) turnover. This pattern is evident in equity indices, index futures and individual stocks. Similarly, we also find that the autocorrelation in equity-index returns in increasing with the unexpected dispersion across the latter week's firm-level returns. Weeks with extreme turnover and dispersion shocks (both high and low) tend to have more macroeconomic news releases. Our findings bear on understanding price formation and the economic interpretation of turnover and dispersion shocks.

 - Robert Connolly
 - Chris Stivers

78. DotCom Mania: The Rise and Fall of Internet Stock Prices

This paper explores a model based on agents with heterogeneous beliefs facing short sales restrictions, and its explanations for the rise, persistence, and eventual fall of Internet stock prices. First, we document substantial short sale restrictions for Internet stocks. Second, using data on Internet holdings and block trades, we show a link between heterogeneity and price effects for Internet stocks. Third, arguing that lockup expirations are a loosening of the short sale constraint, we document average, long-run excess returns as low as -33 percent for Internet stocks postlockup. We link the Internet bubble burst to the unprecedented level of lockup expirations and insider selling.

 - Eli Ofek
 - Matthew Richardson

79. The central proposition of charting is absolutely false, and investors who follow its precepts will accomplish nothing but increasing substantially the brokerage charges they pay. There has been a remarkable uniformity in the conclusions of studies done on all forms of technical analysis. Not one has consistently outperformed the placebo of a buy-and-hold strategy.

Burton Malkiel

80. Counterpoint

Hubert disagrees with the "Not one" statement and as backup for this argument, Hulbert refers to a 1992 study by William Brock, Josef Lakonishok, and Blake Lebaron. The authors analyzed moving averages and trading range breaks on the Dow Jones Industrial Index from 1897 to 1985. The technical rules addressed in the study were the following:

1. Moving Averages: Buy and sell signal were generated by a long and short term moving average crossing. They tested long moving averages of 50,150 and 200 days with short averages of 1,2 and 5 days. The results - "All the buy-sell differences are positive and the t-tests for these differences are highly significant..."

2. Trading range break (Support and Resistance): A buy signal was generated when the price penetrated the resistance level and a sell signal was generated when the price penetrated the support level. Technical analysts believe that the investors sell at the resistance level and buy at the support level. They tested support and resistance based on past 50,150 and 200 days with signals generated when a maximum or minimum was violated by 1% and computed 10-day holding period returns following the buy and the sell signals. The results for both buy and sell signals supported the technical viewpoint. The authors concluded:

• "Our results are consistent with technical rules having predictive power. However, transaction cost should be carefully considered before such strategies can be implemented."
• "In sum, this paper shows that the returns generating process of stocks is probably more complicated than suggested by the various studies using linear models. It is quite possible that technical rules pick some of the hidden patterns. We would like to emphasize that our analysis focuses on the simplest trading rules."

81. The one principal that applies to nearly all these so-called "technical approaches" is that one should buy because a stock or the market has gone up and one should sell because it has declined. This is the exact opposite of sound business sense everywhere else, and it is most unlikely that it can lead to lasting success in Wall Street. In our own stock market experience and observation, extending over 50 years, we have known a single person who has consistently or lastingly made money by thus "following the market". We do not hesitate to declare that this approach is as fallacious as it is popular.

 - Benjamin Graham

82. Technical analysis is doomed to fail by the statistical fact that stock prices are nearly random; the market's patterns from the past provide no clue about its future. Not surprisingly, studies conducted by academicians at universities like MIT, Chicago and Stanford dating as far back as the 1860s have found that the technical theories do not beat the market, especially after deducting transaction fees. It is amazing that technical analysis still exists on Wall Street. One cynical view is that technicians generate higher commissions for brokers because they recommend frequent movement in and out of the market.

William A. Sherden