The Missing Billionaires

Praise for The Missing Billionaires "How much investment risk should I take? How much should I spend, and how much should I save? We all want answers to these questions, and financial economists have them, but the answers need to be translated into practical language. That's exactly why you should read this enjoyable and insightful book, to understand and apply the best thinking about risk-taking and lifetime financial planning." -John Y. Campbell, Morton L. and Carole S. Olshan Professor of Economics at Harvard University "Through years of dialogue with Victor and James, I have put into practice the ideas described in this book, and to great effect. They present a framework which encompasses many of the important principles I have learned through my nearly four decades of trading experience. The Missing Billionaires should be required reading at every bank, hedge fund and investment firm focused on enduring success." -Alan Howard, Founder of Brevan Howard "This book provides a thought-provoking, straightforward introduction to some of the most important questions in personal finance, and an engaging, non-technical description of some of the answers provided by financial economists over the past fifty years." -Robert C. Merton, MIT Sloan School of Management Distinguished Professor of Finance, Nobel Laureate in Economic Sciences "Haghani and White persuasively explain that to make good decisions under uncertainty, not only must we think probabilistically, but also we must apply those probabilities to the appropriate objective function. Thinking beyond the plight of the 'missing billionaires,' perhaps human history would have followed a gentler and more peaceful path if our leaders had made decisions with the ideas of this book in mind." -Philip E. Tetlock, Annenberg University Professor at the University of Pennsylvania, and co-founder of The Good Judgment Project

Victor Haghani has 40 years' experience working and innovating in the financial markets, and has been a prolific contributor to academic and practitioner finance literature. He founded Elm Wealth in 2011 to help clients, including his own family, manage and preserve their wealth with a thoughtful, research-based, and cost-effective approach that covers not just investment management but also broader decisions about wealth and finances. Victor started his career at Salomon Brothers in 1984, where he became a Managing Director in the bond-arbitrage group, and in 1993 he was a co-founding partner of Long-Term Capital Management. He lives in London and Jackson Hole, Wyoming. James White has spent two decades working in finance, covering the gamut of quantitative research, market-making, investing, and wealth management. He is currently the CEO of Elm Wealth, and previously has held research, trading, and executive roles at PAC Partners, Citadel, and Bank of America. He lives in Philadelphia.

Foreword xiii  Preface xvii  About the Authorsxxi  Acknowledgments xxiii  Chapter 1: Introduction: The Puzzle of the Missing Billionaires 1  Section I: Investment Sizing 13  Chapter 2: Befuddled Betting on a Biased Coin 15  Chapter 3: Size Matters When It's for Real 27  Chapter 4: A Taste of the Merton Share 41  Chapter 5: How Much to Invest in the Stock Market? 49  Chapter 6: The Mechanics of Choice 67  Chapter 7: Criticisms of Expected Utility Decision-making 103  Chapter 8: Reminiscences of a Hedge Fund Operator 117  Section II: Lifetime Spending and Investing 127  Chapter 9: Spending and Investing in Retirement 129  Chapter 11: Spending Like You Won't Live Forever 165  Section III: Where the Rubber Meets The Road 173  Chapter 12: Measuring the Fabric of Felicity 175  Chapter 13: Human Capital 193  Chapter 14: Into the Weeds: Characteristics of Major Asset Classes 201  Chapter 15: No Place to Hide: Investing in a World with No Safe Asset 235  Chapter 16: What About Options? 245  Chapter 17: Tax Matters 265  Chapter 18: Risk Versus Uncertainty 275  Section IV: Puzzles 285  Chapter 19: How Can a Great Lottery Be a Bad Bet? 287  Chapter 20: The Equity Risk Premium Puzzle 291  Chapter 21: The Perpetuity Paradox and Negative Interest Rates 297  Chapter 22: When Less Is More 303  Chapter 23: The Costanza Trade 309  Chapter 24: Conclusion: U and Your Wealth 319  Bonus Chapter: Liar's Poker and Learning to Bet Smart 327  Cheat Sheet 335  A Few Rules of Thumb 340  Endnotes 343  Suggested Reading 357  References 359  Index 373