CHAPTER 5
Muggers and Worse
In the heady days of spring 2006, I spoke at a conference of wealth managers about the relationship between economic history and market returns. Before my talk, a tall, distinguished looking advisor from a major Wall Street firm came over and introduced himself. Looking down at me—both literally and figuratively—he solemnly intoned, “Bernstein, for a doctor you write finance pretty well, but you just don’t understand alternatives.”
By alternatives, he meant the laundry list of then - popular, non-traditional investment products that his and other large investment firms peddled: commodities funds, structured investment vehicles, mortgage-backed securities, collateralized debt obligations, credit default swaps, auction-rate securities, and, above all, hedge funds.
All of these vehicles shared three characteristics: In the subsequent two years, a fair percent of them blew up; all of them charged high fees along the way; and all made the brokerage firms a lot of money. By not being skeptical enough about the motivations of the investment industry, millions of investors, and not a few supposedly sophisticated pension and endowment managers, lost trillions of dollars. The real tragedy was that this damage was entirely preventable.

The World’s Largest Bad Neighborhood

In every city in this nation and in every town of any size, people avoid certain areas after dark. It is the same in the investment metropolis, with one slight variation: Here, you do not ...

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