- Paperback: 360 pages
- Publisher: Wiley; 1 edition (June 20, 2005)
- Language: English
- ISBN-10: 0471731749
- ISBN-13: 978-0471731740
- Product Dimensions: 5.8 x 1.1 x 8.8 inches
- Shipping Weight: 1.1 pounds (View shipping rates and policies)
- Average Customer Review: 27 customer reviews
- Amazon Best Sellers Rank: #84,267 in Books (See Top 100 in Books)
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Capital Ideas: The Improbable Origins of Modern Wall Street 1st Edition
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Richard Brealey London Business School This is a great book...captures marvelously the excitement of the search for new ideas.
From the Back Cover
Capital Ideas traces the origins of modern Wall Street, from thepioneering work of early scholars and the development of newtheories in risk, valuation, and investment returns, to the actualimplementation of these theories in the real world of investmentmanagement. Starting with the French mathema-tician LouisBachelierwho wrote about the unpredictability of stock pricesin the early 1900sBernstein brings to life a variety ofbrilliant academics who have contributed to modern investmenttheory over the years:
- Harry Markowitz, who wrote about optimizing the tradeoffbetween risk and reward
- William Sharpe, who shook the pillars of the investmentestablishment by asserting that the market cannot be beaten
- Fischer Black, Myron Scholes, and Robert Merton, who paved theway for the creation of financial derivatives and new ways ofcontrolling risk
- Franco Modigliani and Merton Miller, who extolled the centralrole of arbitrage in determining the value of securities
Filled with in-depth insights and timeless advice, Capital Ideasreveals how the unique contributions of these talented individualsprofoundly changed the practice of investment management as we knowit today.
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Bernstein has written a fascinating pre-LTCM (pre 8/98) book on the history of econometrics and finance, beginning with the origins of the Cowles foundation as the consequence of Cowles' personal interest in the question: Are stock prices predictable? This book is all about heroes and heroic ideas, and Bernstein's heroes are Adam Smith, Batchelier, Cowles, Markowitz (and Roy), Sharpe, Arrow and Debreu, Samuelson, Fama, Tobin, Samuelson, Markowitz, Miller and Modigliani, Treynor, Samuelson, Osborne, Wells-Fargo Bank (McQuown, Vertin, Fouse and the origin of index funds), Ross, Black, Scholes, and Merton. The final heroes (see ch. 14, The Ultimate Invention) are the inventors of (synthetic) portfolio insurance (replication/synthetic options).
This book consists largely of a pre-LTCM (pre-10/98) cheerleading for option-pricing mathematics based on lognormality, and corresponding synthetic portfolio insurance. Osborne and Mandelbrot are mentioned. The book is not error-free: e.g., Mandelbrot's ideas on stock prices are stated as being the origin of chaos theory (!), and Mandelbrot (of random fractals fame) is misportrayed as an `articulate proponent' of chaos theory! Another error (page 182): "..persistent forces are constantly driving the market toward (Modigliani-Miller) equilibrium." The evidence for the EMH is supposed to constitute the `proof' for this nonsense. So much for `proofs' in economics. So ingrained is the false, misleading and inapplicable notion of "equilibrium" in the minds of economists that it is hopeless to expect to educate them out of their own morass. Even Black, who was educated as a physicist as an undergrad, did no better:
"When people are seeking profits, equilibrium will prevail." (F. Black, quoted by Bernstein)
Among the interesting and entertaining stories that are told are: the displacement of Graham and Dodd's `value theory' by the EMH, the revolutionary role played by Wells Fargo Bank in using the `new finance math', and in creating index funds. The importance of the Miller-Modigliani `theorem, which `proved' that the (not-uniquely-defined) `value' of a corporation is independent of it's debt. Then, there is the wild-haired idea of `portfolio insurance', how to eat your cake and have it too (a free lunch, derived from the assumption that free lunches don't exist). No portfolio can be insured against extreme deviations, especially those that occurred in 10/87 and wiped out confidence in LOR (Leland-O'Brien-Rubinstein Associates). But this failure of finance theory produces no crisis for Bernstein, whose book is the history of heroes, not villains. His last chapter, which can be ignored by the reader without loss, is states his ideology: free market ueber Alles. Or: equilibrium will prevail, even without restoring forces ( I like to put it this way: there are no "springs" in the market). I did get something important from this book: the origin of America's spend-spend-spend ideology in the Modigliani-Miller `theorem'.
If the optimal portfolio is not risky enough, borrow to finance it's purchase. (Wells Fargo's application of Tobin's idea, quoted by Bernstein)
(This is a shorter version of a longer review that appeared in fall(...).
By way of example:Piscaqua Research in a study covering the period 1987-96 found that only 10 out of 145 major pension funds, or just seven percent, out performed a portfolio consisting of a simple 60%/40% mix of the S&P 500 index and the Lehman Bond index respectively.
Or is it logical I ask for you to believe that you can predict which actively managed funds will out perform, or are you overconfident of your skills? If you are trying to find the great fund managers who will out perform in the future ask yourself: what am I going to do differently in terms of identifying the future winning fund managers, than did the pension plans and their advisors? And if you are not going to something different what logic is there in playing a game at which others with superior resources have consistently failed?
If you a really serious in finding an investment technique that will provide you with reasonable return with less risk I suggest the following little book. This is a little book that I have written and contains the essential of how to invest. Just click on the title to find the book. How to Make Money in the Stock Market-Buy 2,500 Different Stocks-Pay no Commission
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equation, the book loses x% of potential...Read more