Modern Investing Theories and Practices

Abstract

The eminent financial historian Peter L. Bernstein once stated with his customary elegance:

Investing is a process of making decisions today whose results will not be known until tomorrow. Nobody knows what tomorrow will bring, because nobody can control everything that is going to happen tomorrow. The overarching reality, the launching pad from which investment theory takes off, is that being wrong on occasion is inescapable, even for people who are very smart. The subject matter of investment theory, then, is about how best to manage our affairs in the face of that disagreeable reality.¹

[Note to the reader: This chapter is included as background for the descriptions and prescriptions detailed in the next chapter. Readers with a basic understanding of portfolio management and principles may choose to skip this chapter.]