This is the most sensible book I have ever read about investing. The author, Dan Peris, was trained as a Russian historian who became an investment portfolio manager after the collapse of the Soviet Union destroyed the market for Russian historians. What he brings to the table is a historian’s view of how the heck we go to the point where the stock market has become a giant (rigged) speculator’s casino pumped up by fake money rather than a vehicle for investing in and allocating capital to real profit-making businesses. He places much of the blame at the feet of Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM) driving risk/reward management, though he does give a head nod to the cui bono elements of this tragedy. He recommends, instead, a shift in investment portfolio construction that looks away from daily stock prices and instead focusses on long-term cashflows generated by dividends.
Dan lays out his objective:
“My goal is to place MPT in historical context, to show how some very clever and necessary ideas coming from academia (1950s–1960s) became a practical and functioning doctrine (1970s–1980s) and then degenerated into a heavy dogma (1990s–2000s) that is now a material hindrance to making successful business decisions through the stock market. To assert that MPT has become a failed orthodoxy is hardly a radical claim.”
He starts with a fascinating walk down memory lane.
“Our story, then, begins in the period prior to the Crash of 1929, before the investment community and vaudeville stars began to ask the questions that set the stage for the emergence of Modern Portfolio Theory.”
Walking down memory lane is a practice TV fantasyland residents don’t do nearly enough. How can you claim that “This Time is Different” if you can’t answer different from what, or why? Dan also examines the pernicious effects that armchair academics have on the world when their simplified models leak out of their ivory towers wearing the mantle of scientism, metastasizing into orthodoxy. IMHO it makes no difference whether these models are about stock market investing or Modern Monetary Theory or the efficiency of central planning or eugenics or Critical Race Theory, these frigging academics are dangerous if not taken with a grain of salt and a dollop of scorn. Dan gives Nobel Prize winning economists no quarter.
“MPT’s efficient frontier is a fairy tale, a Shangri-la for mathematically inclined people, a place where historical data accurately predicts the past, a realm in which pure math, with its alluring simplicity, holds sway and banishes uncertainty from the human experience. It is comforting, but it does not exist.”
After an exhaustive and fascinating analysis and autopsy, Dan delivers his verdict.
“Eighty years after the attention-getting event (the Crash of 1929), 75 years after the first analytical efforts (Graham and Dodd, Keynes, Williams), 60 years after the first meaningful go-forward proposal (Markowitz), 50 years after the key simplification and extension of the Markowitz idea (Sharpe and Treynor), 40 years after broad-based implementation of MPT in bank trust departments, and more than 20 years after the introduction of the retail style box by Morningstar and a clear shift from do-it-yourself portfolios to highly constructed models designed to produce maximum return for a given amount of risk—after all these developments, in your best Clint Eastwood voice, you just have to ask yourself one question: Did it work? Well, did it? Did the system smooth out investor returns, protect them from the dips, maximize return for a given level of risk, and vice versa? Did it create certainty where there had been uncertainty? To judge by investor returns, the answer is no. To judge by the stock market of the past two decades—the tech bubble, followed by a crash, the financial asset bubble, followed by a crash, the quantitative easing bubble, followed by who knows what—the answer is a resounding no. To judge by popular sentiment toward this core institution of Western capitalism, the answer is an even more strident no!”
He cries out for sanity and a return to a world in which profit-making companies ignore the pressures of daily stock price swings and quarterly earnings reports and concentrate instead on running sound businesses that distribute dividends to shareholders.
“We live in an upside-down age where making a profit distribution to company owners is viewed, incredibly, as a failing by many S& P 500 Index companies and nothing less than heresy by the overwhelming majority of new economy companies.”
Even if they don’t, he says to hell with them. There are still enough assets out there to build an income-based investment portfolio (though the pickings are slim thanks to interest rate suppression and tax policy).
“So what does asset allocation look like in an income-based portfolio? A generic, starting distribution might consist of 50% stable income, 20% rising income, 10% high yield, 0% cash, and 20% non-income.”
The most substantial issue missing from Dan’s analysis, which makes me beg for another book, is that he doesn’t talk about the rise of the robots and their takeover of our major stock exchanges, making everything he disdains ten times worse. A pox on the hedge fund moguls and their bankster facilitators who add no value as they feed at the Federal Reserve’s fake-money trough and suck the rest of us dry.
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Top reviews from other countries
Andrea G.
Interesting point of view, too much critical on MPT and foggy on the possible alternative
Reviewed in the United Kingdom on February 2, 2020Olli
important info on financial history & why dividends matter
Reviewed in Germany on October 13, 2019