Capital Ideas — Chapter 3: The Interior Decorator Fallacy

1. 1. The author's firm invested in Gillette, Tampax, Georgia Pacific Lumber, and IBM based on the "puberty boom" demographic trend.
2. 2. The author rejected the traditional "interior decorator" approach of tailoring portfolios to each client's unique circumstances.
3. 3. James Tobin's Separation Theorem states that the choice of risky assets is independent of the decision on how much risk to take overall.
4. 4. Tobin's model simplifies Markowitz's Efficient Frontier by allowing investors to combine a single optimal risky portfolio with risk-free assets.
5. 5. Keynes's Liquidity Preference theory argues that interest is a reward for parting with liquidity, not just for saving.
6. 6. Tobin improved Keynes's theory by allowing investors to hold mixed portfolios of cash and risky assets, rather than an all-or-nothing choice.
7. 7. The Separation Theorem implies that a widow's portfolio should not be filled with "safe" stocks, as that leads to poor diversification and low returns.
8. 8. Aggressive investors should not concentrate in high-growth stocks, as that also violates diversification and may not compensate for risk.