Capital Ideas — Chapter 13: The Accountant for Risk

1. 1. In 1973, Peter Bernstein gave up managing other people's money to consult on linking economics with new portfolio theories.
2. 2. The 1973-74 bear market was devastating, worse than the 1930s in some ways, as bond values did not rise and the cost of living did not fall.
3. 3. Bernstein became editor of The Journal of Portfolio Management in 1974, aiming to bridge practitioners and academics.
4. 4. James Vertin denounced the investment profession as a cottage industry and criticized managers for refusing to learn new methods.
5. 5. Barr Rosenberg developed risk models and optimizers that made modern portfolio theory practical for investment professionals.
6. 6. Rosenberg introduced extra-market covariance, showing that stocks move together due to factors like industry, size, and dollar exposure beyond market movements.
7. 7. Rosenberg's MULMAN program applied Markowitz's diversification to multiple portfolio managers, leading to the widespread use of multiple equity managers by pension funds.
8. 8. Rosenberg noted that active investment management is a zero-sum game, and less than zero after transaction costs, a fact many practitioners resisted.
9. 9. Rosenberg's firm RIEM uses a real-time optimizer that makes all investment decisions without human override, with 75% annual turnover.