The Stewardship of Wealth + Website – Successful Private Wealth Management for Investors and Their Advisors

<p>Preface xix</p>
<p>Acknowledgments xxxi</p>
<p>PART ONE The Importance of Private Capital</p>
<p>CHAPTER 1 Wealth in America: The Indispensable Rich 3</p>
<p>Democracy and Capitalism 6</p>
<p>Capitalism and Its Contradictions 7</p>
<p>Providential Societies 10</p>
<p>Risk and Strength 12</p>
<p>America and Decline 13</p>
<p>On China 15</p>
<p>Addressing the Declinists 17</p>
<p>Conclusion: American Distinctiveness and Private Wealth 19</p>
<p>Notes 21</p>
<p>CHAPTER 2 Creative Capital 25</p>
<p>A (Brief) Moral History of Capitalism 26</p>
<p>The Ancients 27</p>
<p>Moral Arguments for Capitalism 28</p>
<p>Voltaire 28</p>
<p>Adam Smith 30</p>
<p>Hegel 31</p>
<p>Contemporary Discussions 32</p>
<p>The Moral Basis of Private Capital 33</p>
<p>Creative Capital in America 34</p>
<p>Higher Education: The Case of St. John s College 37</p>
<p>Politics: The Conservative Resurgence 38</p>
<p>New Business Ideas: Venture Capital in America 39</p>
<p>Creative Capital and Vibrant Societies 42</p>
<p>Why Do Creative Capitalists Persist? 43</p>
<p>The Indispensable Nation 43</p>
<p>Conclusion: Underdogs and Bullies 45</p>
<p>Notes 47</p>
<p>PART TWO The Stewardship of Wealth</p>
<p>CHAPTER 3 Are We Living in a Permanent Financial Crisis? 53</p>
<p>The End of History (Again) 54</p>
<p>A Permanent Financial Crisis? 54</p>
<p>The Cause of the Crisis Matters 55</p>
<p>The Industrial Revolution and Its Aftermath 56</p>
<p>The Great (and Strange) Experiment 57</p>
<p>Seize the Means of Production! 59</p>
<p>The Power to Tax Is the Power to Destroy Societies 60</p>
<p> Borrowing . . . the Disease Is Incurable 61</p>
<p>Now What? 63</p>
<p>But, First, a Note about Germany 66</p>
<p>Investing Capital in a (Very) Uncertain World 67</p>
<p>Conclusion: A World At Risk 68</p>
<p>Notes 68</p>
<p>CHAPTER 4 Risk 73</p>
<p>Families and Investment Risk 73</p>
<p> Low –Risk Investments 74</p>
<p> High –Risk Investments 75</p>
<p> Reasonable –Risk Investments: Marketable Securities 76</p>
<p>The Law of Supply and Demand (Again) 76</p>
<p>Idiosyncratic Ideas about Risk 77</p>
<p>Real Risks: Those Embedded in the Process of Investing 78</p>
<p>Individual Stock Risk versus Broad Market Risk 78</p>
<p>Price Volatility 79</p>
<p>Wildness in the Tails 81</p>
<p>Investor Behavior 82</p>
<p>Making a Truly Terrible Decision 83</p>
<p>Variance Drain 83</p>
<p>Dick and Jane and Variance Drain 84</p>
<p>Later, at Le Cirque 85</p>
<p>Variance Drain Scenarios 86</p>
<p>Behavioral Finance: Are We Hard–Wired for Failure? 87</p>
<p>Professor Odean on Behavioral–Inspired Wealth Transfer 88</p>
<p>What Can We Do about It? 89</p>
<p>Edith and the Headwinds She Faces 90</p>
<p>The First Thing Edith Forgot: Variance Drain 91</p>
<p>The Second Thing Edith Forgot: Inflation 92</p>
<p>The Third Thing Edith Forgot: Investment Costs 92</p>
<p>The Fourth Thing Edith Forgot: Taxes 92</p>
<p>The Fifth Thing Edith Forgot: Spending 93</p>
<p>What Should Edith Do? 93</p>
<p>Conclusion: Preserving Wealth Is Hard Slogging 96</p>
<p>Notes 97</p>
<p>CHAPTER 5 The Collapse of Ethical Behavior 101</p>
<p>What Caused the Crisis? 101</p>
<p>An Unsavory Rehash of the Ethical Failures 102</p>
<p>Ethical Failures in Subprime Lending 102</p>
<p>Ethical Failures among the Subprime Lending Banks 103</p>
<p>Ethical Failures in Auction Rate Securities 104</p>
<p>Ethical Failures among the GSEs 105</p>
<p>The Contemptible Public Disclosures of Financial Firms 107</p>
<p>Shorting the Securities You Are Selling to Your Clients 107</p>
<p>Paulson Bernanke &amp; Co. and the Conspiracy of Silence 108</p>
<p>How Scandal Became Crisis 109</p>
<p>Trust 109</p>
<p>Customers 110</p>
<p>Why Such an Ethical Swamp? 111</p>
<p>Hedge Fund Wannabees 111</p>
<p> When the Music Plays You Have to Dance 112</p>
<p>Compensation Follies 113</p>
<p>Conflicts upon Conflicts 114</p>
<p>Where Do We Go from Here? 115</p>
<p>Conclusion: Fixing the Industry 116</p>
<p>Notes 117</p>
<p>CHAPTER 6 Finding the Right Advisor 119</p>
<p>Open Architecture as a Disruptive Business Model in the Advisory World 120</p>
<p>What Is Open Architecture and Why Is It So Important? 120</p>
<p>Open Architecture in the Financial Industry 121</p>
<p>The Impact on Investors 123</p>
<p>The Outsourced CIO Model 124</p>
<p>The Evolution of the Traditional, Nondiscretionary Model 125</p>
<p>Documenting the Trend toward the Outsourced CIO Model 126</p>
<p>What s Driving the Trend toward the Outsourced CIO Model? 126</p>
<p>The Outsourced CIO Model Today 127</p>
<p>Advantages and Disadvantages of the Outsourced CIO Model 129</p>
<p>Is the Outsourced CIO Model Right for Your Family? 132</p>
<p>How to Select a Good Outsourced CIO Advisor 133</p>
<p>Finding the Right Advisor for Your Family 135</p>
<p>Dimensions of the Problem to Focus On 135</p>
<p>The Schulberg Family 136</p>
<p>Gathering Names 139</p>
<p>The RFP Process 139</p>
<p>Where Is the Sample RFP? 143</p>
<p>Final Diligence 144</p>
<p>Where Does Diligence Leave Off and Psychodrama Begin? 145</p>
<p>Conclusion: Focusing On a Few Key Variables 146</p>
<p>Notes 147</p>
<p>CHAPTER 7 Making Family Investment Decisions 149</p>
<p>The Family Investment Committee Today 150</p>
<p>The Origin of the Investment Committee 150</p>
<p>Committee Dynamics 151</p>
<p>Making an Impact 152</p>
<p>Attempts to Deal with the Problem 152</p>
<p>Asset Allocation Guidelines and Investment Policy Statements 152</p>
<p>Using Outside Experts to Populate the Investment Committee 153</p>
<p>The Separate Investment Management Corporation 153</p>
<p>The Family Investment Committee, Tomorrow 153</p>
<p>The Investment Committee Operating Manual 154</p>
<p>Opportunity Costs: Prudence versus Returns 155</p>
<p>Prudence versus Returns for Trustees 155</p>
<p>Prudence versus Returns for Families 157</p>
<p>Striving for Prudence and Returns 159</p>
<p>Conclusion: Focusing On What Families Do Best 161</p>
<p>Notes 161</p>
<p>CHAPTER 8 Trusts 163</p>
<p>Open–Architecture Trusts 163</p>
<p>A Brief, Unconventional (but Wickedly Accurate) History of the Common–Law Trust from the Client s Perspective 164</p>
<p>Professional Management 165</p>
<p>Deep Pockets 165</p>
<p>Perpetual Life 166</p>
<p>Sound Exercise of Discretion 166</p>
<p>Down with the Bundled Trust! Up with the Open–Architecture Trust! 166</p>
<p>Activities Required to Operate a Trust 167</p>
<p>The Nitty–Gritty of Establishing Open–Architecture Trusts 169</p>
<p>The Rise of Beneficiary Rights 170</p>
<p>If I Was a Big Trust Institution 171</p>
<p>Semi–Open Architecture Trusts 172</p>
<p>Private Trust Companies 173</p>
<p>Total Return Trusts 174</p>
<p>The Uniform Principal and Income Act 174</p>
<p>Unitrust Legislation 175</p>
<p>The IRS View 175</p>
<p>Total Return Trusts in States without Total Return Legislation 175</p>
<p>Conclusion: Let s Get Revolutionary 176</p>
<p>Notes 176</p>
<p>PART THREE The Rich Get Richer</p>
<p>CHAPTER 9 Designing Taxable Investment Portfolios 183</p>
<p>The Markowitz Revolution 184</p>
<p>Problems with Mean Variance Optimization 185</p>
<p>Computational Power 185</p>
<p>Garbage In, Garbage Out 186</p>
<p>The Challenge of Developing Thoughtful Data Inputs 187</p>
<p>Multivariate Modeling 187</p>
<p>Taking Taxes into Account 188</p>
<p>Monte Carlo Simulations 189</p>
<p>The Problem of Fat Tails 190</p>
<p>Best Practices in Designing Investment Portfolios for Families 192</p>
<p>What Are the Objectives for the Portfolio? 192</p>
<p>Current Claims versus Growth Claims on a Portfolio 193</p>
<p>Matching Portfolio Assets to Each Type of Risk 194</p>
<p>Traditional Asset Allocation Modeling 195</p>
<p>Modern Asset Allocation Modeling 196</p>
<p>Satisfying Portfolio Claims Prudently 197</p>
<p>Conclusion: Art versus Science 198</p>
<p>Notes 198</p>
<p>CHAPTER 10 Adding Value to Family Investment Portfolios 203</p>
<p>Moving from the Current Strategy to the New Strategy 203</p>
<p>Adding Value through Manager Selection 205</p>
<p>Adding Value by Tactically Repositioning the Portfolio 206</p>
<p>Adding Value through Opportunistic Investments 207</p>
<p>Adding Value through Monitoring and Rebalancing 209</p>
<p>Conclusion: We Need All The Value–Add We Can Get 210</p>
<p>Notes 210</p>
<p>CHAPTER 11 Investing in U.S. and Non–U.S. Equities 211</p>
<p>U.S. Large– and Mid–Capitalization Stocks 212</p>
<p>U.S. Small–Capitalization Stocks 214</p>
<p>International Developed Country Stocks 216</p>
<p>International Diversification Is Unnecessary 217</p>
<p>Just When You Need It, Diversification Doesn t Work 218</p>
<p>It s Easier and Safer to Gain International Exposure by Investing in ADRs 219</p>
<p>The Bottom Line 219</p>
<p>Emerging and Frontier Markets 220</p>
<p>Emerging Markets 220</p>
<p>Frontier Markets 221</p>
<p>Conclusion: Equity Securities Are At the Core of Most Portfolios 223</p>
<p>Notes 223</p>
<p>CHAPTER 12 Investing Globally 225</p>
<p>Why Go Global? 226</p>
<p>Why Stay Home? 228</p>
<p>Global Investing in the Real World (or, Maybe, Real Investing in a Global World) 229</p>
<p>Is Global Equities an Asset Class? 229</p>
<p>Is It Possible to Succeed as a Global Equity Manager? 230</p>
<p>Can a Global Manager Outperform in the U.S. Portion of its Portfolio? 231</p>
<p>Do the BRICs Really Matter as Much as We Think? 231</p>
<p>What about Investing in Multinationals? 233</p>
<p>The Challenge of Stock–Picking in Non–Nonsynchronous Markets 233</p>
<p>Thinking Nonmonolithically 233</p>
<p>Conclusion: Think Globally, Act Locally 234</p>
<p>Notes 237</p>
<p>CHAPTER 13 Investing in Real Assets 239</p>
<p>Real Estate 239</p>
<p>Leverage 240</p>
<p>Why Invest in Real Estate? 240</p>
<p>How to Invest in Real Estate 241</p>
<p>Oil and Gas 243</p>
<p>Value Creation Mechanisms 244</p>
<p>Hedging to Protect Value 245</p>
<p>Investing Strategies 246</p>
<p>Recommendations 248</p>
<p>Commodities 249</p>
<p>Sources of Return from Commodities Investing 250</p>
<p>The Commodities Indexes 251</p>
<p>Historical Risk, Return, and Sharpe Ratios 251</p>
<p>Historical Correlations 252</p>
<p>Some Thoughts about Historical and Prospective Commodity Returns 252</p>
<p>The Role of Commodities in a Diversified Portfolio 253</p>
<p>Effects of Rebalancing 254</p>
<p>The Impact of Extreme Events 254</p>
<p>Summary 255</p>
<p>Conclusion: The Use and Misuse of Real Asset Exposure 255</p>
<p>Notes 256</p>
<p>CHAPTER 14 Investing in Fixed Income 259</p>
<p>Mistakes Bond Investors Make 259</p>
<p>Employing Managers Who Cheat 259</p>
<p>Paying Too Much for Bond Management 262</p>
<p>Employing Best Practices in Building Bond Portfolios 262</p>
<p>Building Laddered Bond Portfolios 263</p>
<p>Owning Only High–Grade, Noncallable, Long–Term Bonds 264</p>
<p>Actively Managing Municipal Bonds 264</p>
<p>Actively Managing Corporate Bonds 267</p>
<p>High–Yield Bonds 267</p>
<p>Managing Cash 269</p>
<p>Conclusion: Fixed Income Is Underappreciated 270</p>
<p>Notes 271</p>
<p>CHAPTER 15 Investing in Hedge Funds 273</p>
<p>What Is a Hedge Fund? 274</p>
<p>Types of Hedge Funds 275</p>
<p>Challenges for Hedge Fund Investors 277</p>
<p>Building a First–Rate Hedge Fund Portfolio 285</p>
<p>Conclusion: Should Anyone but Yale Invest in Hedge Funds? 288</p>
<p>Notes 290</p>
<p>CHAPTER 16 Investing in Private Equity 293</p>
<p>Why Invest in PE? 294</p>
<p>Persistence of Returns 294</p>
<p>The Importance of Diversification 295</p>
<p>Private Equity Returns 296</p>
<p>The Return Characteristics of PE Investments 296</p>
<p>Gaining Exposure to Private Equity 297</p>
<p>PE Funds of Funds 298</p>
<p>A Global Asset Class 298</p>
<p>Illiquidity and the J–Curve Effect 299</p>
<p>Ramping Up to Your Target Allocation 300</p>
<p>Waterfall Analysis 300</p>
<p>Secondary PE Investing 302</p>
<p>The Evolution of Secondary Investing 302</p>
<p>Secondary Investing Strategies 303</p>
<p>Identifying High–Quality Secondary Funds 304</p>
<p>Conclusion: The Ultimate Aspirational Asset 304</p>
<p>Notes 305</p>
<p>CHAPTER 17 Working with Money Managers 307</p>
<p>The Business of Money Management 308</p>
<p>Hapless Asset Management 308</p>
<p>Survivorship Bias 311</p>
<p>Fees and Costs 311</p>
<p>Traditional Managers 313</p>
<p>The Main Problem: Recent Good Performance Is Almost Irrelevant 314</p>
<p>Characteristics of Best–in–Class Managers 317</p>
<p>Objectionable Characteristics 320</p>
<p>Finding Best–in–Class Managers 320</p>
<p>Monitoring Best–in–Class Managers 323</p>
<p>Active, Indexed, Fundamental, and Structured Products 324</p>
<p>Alternative Managers 326</p>
<p>Working with Hedge Funds 326</p>
<p>Working with Private Equity Funds 328</p>
<p>Conclusion: At Least Managers Are Interesting 329</p>
<p>Notes 330</p>
<p>CHAPTER 18 Managing Investment–Related Taxes 331</p>
<p>Designing Portfolios from an After–Tax Perspective 332</p>
<p>Asset Location 332</p>
<p>Asset Class Strategies 333</p>
<p>Tax–Aware Managers 333</p>
<p>Identifying Tax–Aware Managers 335</p>
<p>Harvesting Losses 337</p>
<p>Conclusion: You Can t Eat Gross Returns 338</p>
<p>Notes 338</p>
<p>CHAPTER 19 Asset Location and Implementation 341</p>
<p>Asset Location Issues 341</p>
<p>Examples of Asset Locations and the Associated Investment Implications 342</p>
<p>Implementation Issues 347</p>
<p>Macro Considerations 348</p>
<p>Micro Considerations 351</p>
<p>Implementing in PE and Hedge 353</p>
<p>Conclusion: It s Not Just a Technical Issue 353</p>
<p>Notes 353</p>
<p>CHAPTER 20 Monitoring and Rebalancing Taxable Portfolios 355</p>
<p>Performance Monitoring 356</p>
<p>Money Manager Reports 356</p>
<p>Bank Custody Reports 357</p>
<p>Investment Consultant Reports 357</p>
<p>Conflicts between Reports 358</p>
<p>Interpreting Performance Reports 359</p>
<p>Monitoring Manager Performance 360</p>
<p>Rebalancing Taxable Portfolios 362</p>
<p>Setting Strategic Ranges 363</p>
<p>Rebalance Back to What? 363</p>
<p>How Often to Rebalance? 364</p>
<p>Conclusion: Monitoring and Rebalancing Are Stewardship Issues 365</p>
<p>Notes 366</p>
<p>CHAPTER 21 Investment Policy Statements 367</p>
<p>The Investment Policy Statement 367</p>
<p>Spending Policy Statements 369</p>
<p>Cash Guidelines 369</p>
<p>Manager Guidelines 369</p>
<p>The Investment Committee Policy Manual 370</p>
<p>Letters to the Family 370</p>
<p>Conclusion: Don t Skimp on Documenting Your Decisionmaking 370</p>
<p>CHAPTER 22 Miscellaneous Challenges for Private Investors 371</p>
<p>Asset Custody 371</p>
<p>What Services Does a Custodian Offer? 372</p>
<p>Evaluating Custodians 373</p>
<p>Custody Pricing 374</p>
<p>Custody for Taxable Accounts 375</p>
<p>Securities Lending 376</p>
<p>Brokers as Custodians 377</p>
<p>Concentrated Security Positions 378</p>
<p>Dealing with the Emotional Impact of a Concentrated Position 381</p>
<p>Strategies for Diversifying Concentrated Positions 382</p>
<p>Establishing a Family Office 384</p>
<p>Why a Family Office? 384</p>
<p>What Is the Minimum Size for a Family Office? 384</p>
<p>What Responsibilities Are Carried Out by a Family Office? 384</p>
<p>Where to Begin? 386</p>
<p>Are There Alternatives to the Stand–Alone Family Office? 387</p>
<p>Family Investment Partnerships 387</p>
<p>Philanthropy 389</p>
<p>Conclusion: There Are Challenges Everywhere We Look 392</p>
<p>Notes 392</p>
<p>Afterword: On Happiness 395</p>
<p>Stereotypes of the Rich 396</p>
<p>The Rich and the Faux Rich 396</p>
<p>The Real Way the Rich Are Different 398</p>
<p>Children and the Wealthy 400</p>
<p>Marriage and the Wealthy 400</p>
<p>Work and the Wealthy 401</p>
<p>Failed Stewardship and Family Unhappiness 403</p>
<p>Wealth and Happiness 405</p>
<p>Notes 405</p>
<p>About the Companion Website 407</p>
<p>About the Author 409</p>
<p>Index 411</p>