243
CONCLUSION:
THE V CULTURE
R
eaders with an arbitrage orientation may regret that the exem-
plars of great modern CEOs covered in the last chapter, apart
from Warren Buffett, consist of one who is dead, one who has an-
nounced his retirement, and only one who is likely to reign for the
foreseeable future. Who’s next, and why not name them?
If I knew, I would not say. Not so much because I want to gain
a competitive edge. No, my reticence is precisely because of an in-
sight in this book: Judgment is the key, and my judgment will invar-
iably differ from yours. Our circles of competence are necessarily
different. Our interpretation of the past differs, and our prognosis
for the future must as well. It contradicts the whole point of this
book for me to tell you who I believe are the up-and-coming star
CEOs. My picks are irrelevant to your judgments.
Go back to the masters mentioned in Chapter 1 and you’ll see
that it was precisely their independence of thought, their utter and
profound common sense, which led to their remarkable success. I
condense these ideas and insights in the spirit of a teacher and pro-
fessor, not an investment adviser. I hope you’ll use these pages as a
foundation for picking stocks as a savvy, sophisticated investor (or,
failing that, picking advisers who share respect for the basic philos-
ophy of outstanding investors such as Graham and Buffett).
The basic philosophy of business analysis investing integrates
three branches: finance, accounting, and governance. Finance is
commonly defined as “the science of management of money and
other assets.” So much for this definition, if you agree that finance
is one part science and the other part art. Behavioral economics, a
field that draws on numerous disciplines, including psychology, sta-

Row, 1973), 108.
2. Fred Schwed, Jr., Where Are the Customers’ Yachts? (1st ed. 1940; rev. ed. John
Wiley & Sons, 1995), 6–7.
3. The New York Stock Exchange Fact Book (New York, 1999), http://
www.nyse.com; Gretchen Morgenson, “Investing’s Longtime Best Bet Is Being
Trampled by the Bulls,” The New York Times, January 15, 2000.
4. Report of the Presidential Task Force on Market Mechanisms (the Brady Re-
port), 1988.
5. Greg Ip, “Market on a High Wire,” The Wall Street Journal, January 18, 2000.
6. Burton G. Malkiel, A Random Walk Down Wall Street (1st ed. 1973; 7th rev.
ed. W. W. Norton, 1999), 57–61.
7. Warren E. Buffett and Lawrence A. Cunningham, The Essays of Warren Buffett:
Lessons for Corporate America (The Cunningham Group, 1997), 72.
8. Robert J. Shiller, Irrational Exuberance (Princeton University Press, 2000), 118–
132, catalogs and evaluates the 25 top bursts and busts on global stock ex-
changes during one- and five-year periods from the 1960s through the 1990s.
9. Joseph de la Vega, Confusio´n de Confusiones (1st ed. 1688; rev. ed. John Wiley
& Sons, 1996), 159–165 (the selected quotation condenses original material
without indicating omissions).
10. Malkiel, Random Walk,185.
11. Buffett and Cunningham, Essays, 63, 84. The price per share was $5.63, ag-
gregating $100 million, compared to a value of $400 to $500 million.
12. Graham, Intelligent Investor, 289 (footnote omitted).
Chapter 2
1. For additional analysis and sources, consult Lawrence A. Cunningham, “From
Random Walks to Chaotic Crashes: The Linear Genealogy of the Efficient
Capital Market Hypothesis,” The George Washington University Law Review,
vol. 62 (1994), on which this chapter is based.
Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use
246

17. Andrei Shleifer, “Do Demand Curves for Stocks Slope Down?” Journal of Fi-
nance, vol. 41 (1986).
18. Francis Fukuyama, Trust: The Social Virtues and the Creation of Prosperity (Free
Press, 1995).
19. Graham, Intelligent Investor, 61, n. 2.
20. Lawrence A. Cunningham, ed., “Conversations from the Buffett Symposium,”
Cardozo Law Review, vol. 19 (Sept.–Nov. 1997), 812.
Chapter 3
1. For additional analysis and sources, consult Lawrence A. Cunningham, “From
Random Walks to Chaotic Crashes: The Linear Genealogy of the Efficient
Capital Market Hypothesis,” The George Washington University Law Review,
vol. 62 (1994), on which this chapter is based.
Notes
247
2. H. E. Hurst, “Long-Term Storage Capacities of Reservoirs,” Transactions of the
American Society of Civil Engineers, vol. 116 (1951).
3. Edgar E. Peters, Chaos and Order in the Capital Markets (John Wiley & Sons,
1991); Edgar E. Peters, Fractal Market Analysis: Applying Chaos Theory to In-
vestment and Economics (John Wiley & Sons, 1994).
4. Henri Poincare´, Science and Method (1st ed. 1908; rev. ed. Dover Press, 1952).
5. Edward Lorenz, “Deterministic Nonperiodic Flow,” Journal of Atmospheric Sci-
ences, vol. 20 (1963); Edward Lorenz, Nonlinear Dynamical Economics and
Chaotic Motion (Springer-Verlag, 1989).
6. Alan Wolf, “Chaos in the Stadium,” Algorithm, April 1992.
7. These figures were prepared by Alan Wolf.
8. Alan Wolf, et al., “Determining Lyapunov Exponents from Time Series,” Phys-
ica, vol. 16D (1985).
9. Benoit B. Mandelbrot, The Fractal Geometry of Nature (W. H. Freeman, 1988);
Benoit B. Mandelbrot, ed., Fractals and Scaling in Finance: Discontinuity, Con-
centration, Risk (Springer-Verlag, 1997).

New York Times, February 25, 2000.
7. Jeffrey Keegan, “Regulators Step Up Fight against Internet Fraud,” Investment
Dealers Digest, August 7, 1998.
8. Philip L. Carret, The Art of Speculation (1st ed. 1930; rev. ed. Fraser, 1984).
9. Edwin LeFe`vre, Reminiscences of a Stock Operator (1st ed. 1923; rev. ed. John
Wiley & Sons, 1994).
10. Benjamin Graham, The Intelligent Investor (1st ed. 1949; 4th rev. ed. Harper &
Row, 1973), 142.
11. Leslie Eaton, “Internet Investing: Spotlight on Risk,” International Herald Trib-
une, December 6, 1996.
12. SEC v. Aziz-Golshani, No. 99–13139 (CBM) (Federal Central District of Cali-
fornia, December 15, 1999); Rebecca Buckman and Michael Schroeder, “Web
Postings Draw Charges of Stock Fraud,” The Wall Street Journal, December 16,
1999; Gretchen Morgenson, “Internet’s Role Is Implicated in Stock Fraud,” The
New York Times, December 16, 1999.
13. SEC Litigation Release No. 16399 (January 5, 2000) (reporting on SEC v. Yun
Soo Oh Park, Federal Northern District of Illinois, Case No. 00C 0049); Jen-
nifer Friedlin, “The SEC Files Civil Fraud Charges against Tokyo Joe,” The-
Street.com & NYTimes.com, January 2000; John C. Coffee, Jr., “Tokyo Joe and
the First Amendment,” The New York Law Journal, January 20, 2000.
14. “Net Damage: PairGain Hoax Revealed,” Investor Relations Business, April 26,
1999; Associated Press, “PairGain Worker Sentenced in Fraud Case,” The New
York Times, August 31, 1999.
15. Alex Berenson, “S.E.C. Reaches Settlement in Web-Based ‘Pump and Dump’
Case,” The New York Times, March 3, 2000; Michael Schroeder, “Georgetown
Students Draw Web Investors—and an SEC Bust,” The Wall Street Journal,
March 3, 2000.
16. William M. Bulkeley, “Presstek Suit Alleges Short Sellers Posted False State-
ments On-Line,” The Wall Street Journal, September 18, 1997.
17. Gretchen Morgenson, “S.E.C. Says Teenager Had After-School Hobby: Online

Geehan, “Profit Up at Citigroup, Merrill and Schwab,” The New York Times,
April 18, 2000.
28. Patrick McGeehan, “The Unmutual Fund,” The New York Times, May 18, 2000.
Chapter 5
1. Benjamin Graham, The Intelligent Investor (1st ed. 1949; 4th rev. ed. Harper &
Row, 1973), 110.
2. Warren E. Buffett and Lawrence A. Cunningham, The Essays of Warren Buffett:
Lessons for Corporate America (The Cunningham Group, 1997), 120, 122, 134.
3. Ibid., 110.
4. John C. Bogle, Common Sense on Mutual Funds (John Wiley & Sons, 1999).
5. Gerald M. Loeb, The Battle for Investment Survival (1st ed. 1935; rev. ed. John
Wiley & Sons, 1996).
6. Buffett and Cunningham, Essays, 79; Graham, Intelligent Investor, 54, 282–
283.
7. Gretchen Morgenson, “Buying on Margin Becomes a Habit,” The New York
Times, March 24, 2000.
8. Gretchen Morgenson, “Stock-Trading Cheerleader Now Faces $45 Million
Debt,” The New York Times, April 19, 2000.
9. Nick Leeson, Rogue Trader (Warner, 1997).
10. Graham, Intelligent Investor, 228–231.
11. Buffett and Cunningham, Essays, 57.
12. Charles T. Munger, “A Lesson on Elementary, Worldly Wisdom As It Relates
to Investment Management and Business,” Outstanding Investor Digest,vol.X
(May 5, 1995).
250
Notes
13. Edwin LeFe`vre, Reminiscences of a Stock Operator (1st ed. 1923; rev. ed. John
Wiley & Sons, 1994).
14. Graham, Intelligent Investor, 245.
15. Ibid., 124–125

6. Adrian J. Slywotzky and David J. Morrison, authors of Profit Patterns (Times
Business, 1999), identify and discuss the patterns described in the accompa-
nying text.
7. Bill Miller, “Amazon.com’s Allure,” Barron’s, November 15, 1999.
8. Buffett and Cunningham, Essays, 96–97.
Notes
251
9. Graham, Intelligent Investor, 286.
10. Buffett and Cunningham, Essays, 99.
11. The psychology literature calls the resistance bias a “principle of conservatism”
and the pattern-seeking bias a “representativeness heuristic.” Both labels seem
not only unwieldy but imprecise when adapted for thinking about investor be-
havior. Nevertheless, investment theorists cling to these terms in arguing that
these cognitive biases play a role in explaining market inefficiencies. For an
example, consider Andrei Shleifer, Inefficient Markets: An Introduction to Be-
havioral Finance (Oxford University Press, 2000).
12. Buffett and Cunningham, Essays,87.
13. Ibid., 53.
Chapter 8
1. Leopold A. Bernstein and John J. Wild, Analysis of Financial Statements (5th
ed. McGraw-Hill, 2000), 102–03.
2. Benjamin Graham, The Interpretation of Financial Statements (1st ed. 1937; rev.
ed. Harper Business, 1998), 32.
3. For more, consult ibid. or Lawrence A. Cunningham, Introductory Accounting
and Finance for Lawyers (2nd ed. West Group, 1999), on which this and the
next chapter draw (the title is intended to show that it is for the nonaccountant;
it is not exclusively for lawyers).
Chapter 9
1. Benjamin Graham, The Intelligent Investor (1st ed. 1949; 4th rev. ed. Harper &
Row, 1973), 277.

17. Graham, Interpretation, 75–76.
Chapter 10
1. David Burgstahler and Ilia Dichev, “Earnings Management to Avoid Earnings
Decreases and Losses,” Journal of Accounting and Economics, vol. 24 (1997).
2. Michael Schroeder, “SEC to Adopt Disclosure Rules for Companies,” The Wall
Street Journal, December 16, 1999.
3. New York Stock Exchange Listed Company Manual, Section 303.01, Audit Com-
mittees (available from Big accounting firms used
these rules and recommendations to formulate statements of audit committee
standards. For example, see PriceWaterhouseCoopers, Audit Committees: Best
Practices for Protecting Shareholder Interests (1999); KMPG, Shaping the Audit
Committee Agenda (1999).
4. Graham’s lampooning appears in Warren E. Buffett and Lawrence A. Cun-
ningham, The Essays of Warren Buffett: Lessons For Corporate America (The
Cunningham Group, 1997), 159–65. Briloff’s work includes More Debits Than
Credits (Harper & Row, 1976) and Unaccountable Accounting (Harper & Row,
1972).
5. Some of these charade discussions are adapted from Lawrence A. Cunningham,
Introductory Accounting and Finance for Lawyers (2nd ed. West Group, 1999).
6. Buffett and Cunningham, Essays, 193.
7. Benjamin Graham, The Intelligent Investor (1st ed. 1949; 4th rev. ed. Harper &
Row, 1973), 167.
Chapter 11
1. Benjamin Graham, The Intelligent Investor (1st ed. 1949; 4th rev. ed. Harper &
Row, 1973), 155.
2. Ibid., 286.
3. Warren E. Buffett and Lawrence A. Cunningham, The Essays of Warren Buffett:
Notes
253
Lessons for Corporate America (The Cunningham Group, 1997), 147.

10. Benjamin Graham, The Memoirs of the Dean of Wall Street (McGraw-Hill, 1996;
posthumous publication, Seymour Chatman, ed.), 201–212. The company was
Northern Pipeline, and the year was 1928 (Graham was 34 years old). Ibid.,
320.
11. Benjamin Graham, The Intelligent Investor (1st ed. 1949; 4th rev. ed. Harper
and Row, 1973), 270.
Chapter 13
1. Joseph Kahn, “AMP Rejects Allied Signal’s Takeover Bid of $10 Billion,” The
New York Times, August 22, 1998.