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Abstract:
In October, 1991, there occurred off the coast of Massachusetts a perfect storm, a tempest created by a rare coincidence of events. In the late 90s, there was another perfect storm, an also rare coincidence of forces which caused huge waves in our financial markets, as the NASDAQ index soared, collapsed, and bounced part way back.

What had happened to the so-called rational investors, the smart money, whom economists have for decades said would keep market prices in close touch with the underlying values? Despite the hundreds of papers on markets and their efficiency, no scholar, not one, has looked to see who are these rational, i.e., value investors, how they operate, and with what results.

I decided to see how a group of ten value funds, selected by a knowledgeable manager, performed in the disorderly boom-crash-rebound years of 1999-2003. Did they suffer the permanent loss of capital of so many who invested in the telecom, media and tech stocks? How did their overall performance for the five years compare with the returns on the S&P 500?

For most managers, mimicking the index, it was difficult not to own Enron, Oracle and the like, but the ten value funds had stayed far away. Instead, they owned highly selective portfolios, mostly 34 stocks or less, vs. the 160 in the average equity fund. They turned their portfolios at one-sixth the rate of the average fund. Bottom line: every one of the ten outperformed the index over the five year period, and as a group they did so by an average of 11% per year, the financial equivalent of back-to-back no-hitters.

The article closes with a discussion of the clearly large implications for investors, market watchers and public policy. As for those economic models, let the chips fall where they will.

Abstract:
The mutual fund is a superb concept, a vehicle for investors to pool their savings in a diversified portfolio and thus acquire experienced management, as well as economies of scale in fees and expenses. Mutual funds offer, too, remarkable flexibility, the ability to withdraw at will even modest sums, at the underlying asset value. Being a favored child of the law, investors receive detailed disclosures, a safe harbor from double taxation, and SEC oversight. Markets fluctuate, but a mutual fund's diversity and presumably skilled management allow the investor to take a longer view, freeing him from the concern that Stock A or B will report lower earnings next week. Clearly, those thrifty Scots had a brilliant idea, and equity mutual funds alone now have $4 trillion in assets, up from a mere $250 billion as recently as 1990.

What follows is a speech I gave in December 2005 before the NY Society of Security Analysts. It was billed as a celebration of Graham-and-Dodd style value investing, and indeed the invitation had been a consequence of an article I wrote earlier that year, in which I explored a dramatically successful group of patient investors ("Searching for Rational Investors in a Perfect Storm"). I used the occasion to take a broader look at mutual funds, and in particular to study large cap growth funds, which it developed play the performance game, turning over their portfolios at stunning rates with disheartening results for investors, though not for the managers. An update of my earlier study provided a useful benchmark.

Abstract:
This is one of a group of papers, at Brookings awaiting publication, celebrating the remarkably sustained value of Albert Hirschman's "Exit, Voice & Loyalty," published in 1971. Those who know that book -- and everyone should -- recognize that exit-voice has particular relevance in corporate governance. It is a conundrum: shareholders "exit" at a turnstile pace -- turnovers of 75% a year in NYSE stocks -- and shareholder "voice" only from a handful of state/local pension funds. Why then has the American corporation come to be seen as the paradigm? The paper focuses on the exceptionally high degree of financial transparency here, far better than elsewhere, which with the high degree of public confidence and interest engendered thereby have produced an extraordinary level of media attention -- the voice of the analysts and other paparazzi -- helping greatly to explain the palace upheavals at GM, Kodak, Westinghouse and elsewhere. Far from being an isolated phenomenon, it is simply one aspect of a society and market structure that could function well only with pervasive sunshine. The paper looks also at Germany, Japan, and (ach!) So. Korea and the like.

Abstract:
In October, 1991, there occurred off the coast of Massachusetts a perfect storm, a tempest created by a rare coincidence of events. In the late -90s, there was another perfect storm, an also rare coincidence of forces which caused huge waves in our financial markets, as the NASDAQ index, for one, soared from 1200 in 1997 to 5000 in 2000 and back to 1100 in 2002.

These were the days of the New Economy - low inflation and unemployment, government surpluses, and the Internet that would change how we work and play. Suddenly, all of us were watching crawlers on CNBC to see how rich we were. But the bubble triggered a period of unmatched and pervasive corporate fraud. Using academic blessings of stock options as the link of pay for performance, executives took huge helpings and then manipulated reported earnings to achieve the stock gains that would bring their compensation to stunning heights. In the five years ended 2003, over 1300 companies, many major, restated their earnings, and those were only the more egregious cases.

It was a broad-based, cultural failure, one that enlisted the active support, nay connivance, of the various gatekeepers, notably of course auditors, but also analysts, audit committees, bankers, and, yes, the lawyers who crafted the hollow transactions that would enable debt to disappear from balance sheets and create revenues from thin air. But then, we all wanted so much to believe.

The author brought to the article his background as a member of the Panel on Audit Effectiveness, appointed in 1998 at the instance of Chairman Levitt of the SEC, and also his longstanding skepticism about efficient market theory.

Abstract:
In the literature of corporate governance, a great deal has been written about the variety of factors that may have helped American industry to remain/become competitive. Some relate to the workings of the board, e.g., independent directors, others to markets, e.g., takeovers, and of course others to shareholder activism. Very little attention, however, has been given to the enormous impact of the accounting and disclosure mandates that are unique to the U.S., and which have played such a large role not just in making financial markets more efficient but in making management more effective as well. Almost unnoticed, good financial disclosure has become a corporate governance tool of the first order, effective, timely, cheap and (legally, at least) all but self-executing. The paper explores concrete examples of the impact of financial transparency -- in matters such as segment reporting and retiree benefits, among others -- and the relative backwardness of industrialized countries elsewhere. As has been said, you manage what you measure. In the U.S., we measure more and with more consistent detail across companies and across time than elsewhere. The issue is particularly important at the present time, when the SEC is being urged to accept foreign disclosure standards, in order to ease access by foreign companies to American capital markets.