Capital Ideas: Improbable Origins Of Modern Wall Street
The capital market is an environment in which investors collect information, make forecasts of the future and trade their money for the prospect of receiving a greater quantity of it at some point in the future. How to investors actually make these decisions? Is their time and effort well-spent? How can investors improve in their efforts? In Capital Ideas, the late Peter Bernstein tells the story of inquiry into the market for investor capital. The story is surprising in a number of ways. For one, the models of investor behavior with which we operate in the markets today were not created by traders or investment advisors who actively participate in the markets. They were created by academics who studied investor behavior from afar and many were motivated not by an interest in making money but by pursing research questions often unrelated to investing.
Another surprising theme is that their insights and ideas were rarely adopted immediately when introduced to the industry. Although Wall Street attracts bright and aggressive people who seek to distinguish themselves with a competitive edge, only the most curious and thoughtful practitioners adopted these insights prior to their gaining wider acceptance. Despite significant evidence that the equity market is efficient, investors in the equity market continue to spend on research and portfolio management without clear evidence that these resources are worth the price.
A third surprising theme is the role of collaboration between the innovators of the theories of investing. The investment industry actively promotes the talents of individuals in advancing itself, yet the greatest contributions have been born from teamwork, which as a former Chief Investment Officer of a large asset manager is a critical insight.
Besides describing the history and practical uses of financial theories, Bernstein also describes the limits and perils of financial engineering, such as the case of “portfolio insurance” which played a role in the stock market crash of 1987.
Bernstein’s account is based not just on a review of the research that academics conducted over many decades, but also personal interviews and his collaboration with many of the innovators that created the foundation of today’s wealth management industry. The book is a lively read and covers nearly all of the content that I learned as a student in business school but with greater context to aid one’s understanding of the origin of the concepts that are so important to the management of money. This book will be helpful both to the professional money manager who has not previously embarked on a systematic study of Modern Portfolio Theory and the more casual investor who seeks opportunities to study how investing in the market works.
Peter Bernstein was an investment manager, economic historian and educator. After receiving his bachelor’s degree at Harvard, he assumed leadership of his family’s wealth management business, which grew to prosper. He served as the first editor of the Journal of Portfolio Management and frequently lectured at events sponsored by The CFA Institute.
