Capital Ideas by Peter L. Bernstein

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Early Predictability Studies - Louis Bachelier (1900) showed stock prices are shaped by random factors, making precise forecasting impossible - Alfred Cowles (1930s) proved professional forecasters failed to outperform random chance - Charles Dow developed tools like Dow Jones Averages for analyzing market trends Portfolio Theory Evolution - Harry Markowitz (1952) revolutionized investing by showing how proper diversification manages risk - James Tobin introduced the Separation Theorem (1958) to simplify portfolio management decisions - William Sharpe developed the Capital Asset Pricing Model (CAPM) arguing the market is the ultimate efficient portfolio Market Efficiency Research - Holbrook Working and Maurice Kendall demonstrated price changes were largely random - Eugene Fama developed three levels of market efficiency theory: weak, semi-strong, and strong - Paul Samuelson showed current market price is best estimate of intrinsic value Valuation Methods - John Burr Williams (1938) created Dividend Discount Model based on future cash flows - Benjamin Graham pioneered value investing using hard financial data - Modigliani-Miller Theory showed company value is independent of capital structure Practical Applications - Wells Fargo team (McQuown, Fouse) created first index fund tracking S&P 500 - Development shifted industry from active stock picking to passive indexing - Portfolio insurance invented by Hayne Leland to protect against market downturns - 1987 market crash exposed limitations of portfolio insurance but spurred risk management innovation Major Themes: - Markets are fundamentally unpredictable but efficient at processing information - No reward without risk; beating the market consistently is extremely difficult - Mathematical/quantitative approaches transformed investing from art to science - Academic theories eventually revolutionized real-world investment practices