Summary of Peter L. Bernstein's Capital Ideas

By IRB Media

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#1 The demand for the wisdom produced by armies of security analysts, portfolio managers, television pundits, software peddlers, and newspaper columnists shows no sign of waning. Some of the wealthiest people on Wall Street are professionals whose bank accounts have been inflated by a constant flow of investment advisory fees.

#2 Bachelier was a French mathematician who developed the theory of probability and stochastic processes in an attempt to explain the behavior of stock prices. He was a frustrated unknown in his own time, and it was long before he finally won an appointment at the provincial university at Besancon.

#3 Bachelier’s real problem was that he had chosen an odd topic for his dissertation. He was convinced that the financial markets were a rich source of data for mathematicians and students of probability. His superiors did not agree.

#4 The key to Bachelier’s insight is his observation that contradictory opinions about market changes diverge so much that at the same instant buyers believe in a price increase and sellers believe in a price decrease. This means that prices will only move when the market has reason to change its mind about what the price considered most likely is going to be.

• Language: English
• Publisher: IRB Media
• Release date: May 14, 2022
• ISBN: 9798822517653

IRB Media

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Insights on Peter L. Bernstein's Capital Ideas

Contents

Insights from Chapter 1

Insights from Chapter 2

Insights from Chapter 3

Insights from Chapter 4

Insights from Chapter 5

Insights from Chapter 6

Insights from Chapter 1

#1

The demand for the wisdom produced by armies of security analysts, portfolio managers, television pundits, software peddlers, and newspaper columnists shows no sign of waning. Some of the wealthiest people on Wall Street are professionals whose bank accounts have been inflated by a constant flow of investment advisory fees.

#2

Bachelier was a French mathematician who developed the theory of probability and stochastic processes in an attempt to explain the behavior of stock prices. He was a frustrated unknown in his own time, and it was long before he finally won an appointment at the provincial university at Besancon.

#3

Bachelier’s real problem was that he had chosen an odd topic for his dissertation. He was convinced that the financial markets were a rich source of data for mathematicians and students of probability. His superiors did not agree.

#4

The key to Bachelier’s insight is his observation that contradictory opinions about market changes diverge so much that at the same instant buyers believe in a price increase and sellers believe in a price decrease. This means that prices will only move when the market has reason to change its mind about what the price considered most likely is going to be.

#5

The square root of time is similar to the random walk of molecules in space. Stock prices vary according to the square root of time, and they resemble this behavior.

#6

Bachelier’s work was not well known outside the economics profession until 1954, when Savage found a copy of his book in a university library. He spread the word throughout the profession, and Bachelier’s influence is evident in Samuelson’s early treatment of the behavior of speculative prices.

#7

The Wall Street Journal, launched in 1889, was the main source of information for Wall Street traders and investors. The Dow Theory, developed by Charles Dow, co-founder of Dow, Jones Co. in 1882, was the most famous recipe for predicting stock prices.

#8

The Dow Theory is the belief that stock prices, once started on a trend, will tend to continue until the market itself sends out a signal that those trends are about to reverse.

#9

The Dow Theory is the first attempt to create some sort of aggregate indicator of stock-market trends. It was created by Charles Dow in 1884, and it consisted of the closing prices of eleven companies: nine railroads and two industrials.

#10

The sparseness of industrials in the list is evidence of the boldness of Dow’s foresight about the industrial market, as well as an indication of the importance of railroads to the American economy in the late nineteenth century.

#11

The Dow Theory was developed by Charles Dow, who wrote about it in his editorials for The Wall Street Journal. It states that prices on the New York Stock Exchange are sufficient in themselves to reveal everything worth knowing about business conditions.

#12

In 1928,