Chapter 34

Peter L. Bernstein

New York Times, June 8, 2009

Peter L. Bernstein, Explainer of Risks of Stocks, Dies at 90

 

Peter L. Bernstein, an economic historian and a widely read popularizer of the efficient market theory, which changed trading behavior on Wall Street, died Friday at New York- Presbyterian/Weill Cornell hospital. He was 90 and lived in Manhattan. . . .

 

Mr. Bernstein published most of his best-known books in the last 20 years of his life, including the best-selling Against the Gods: The Remarkable Story of Risk (John Wiley & Sons) in 1996 and Capital Ideas: The Improbable Origins of Modern Wall Street (Free Press) in 1991.

 

In these books and in earlier work, he embraced and explained an investment strategy that came to be known as efficient market theory. Rather than just picking stocks because they seemed to be good bets, investors increasingly diversified their portfolios, using sophisticated mathematical equations, developed in academia, with the goal of measuring and managing risk. . . .

 

Mr. Bernstein was the founder, in 1973, of Peter L. Bernstein Inc., which published his newsletter and also had as clients wealthy families and foundations, helping them manage their wealth. A year later, he founded the Journal of Portfolio Management, a scholarly journal that brought traders and academics into communication with each other as they developed efficient market theory. . . .

 

[Peter Bernstein graduated] from Harvard magna cum laude, and . . . spent World War II as an officer in the Office of Strategic Services, the C.I.A.’s predecessor, in London. . . .

The financial sector of our American society is hardly overpopulated with Renaissance men—human beings of great intellect, prodigious works, wide-ranging vision, scholarly wisdom, multidisciplinary focus, entrepreneurial spirit, and a commitment to raising our standards of professional conduct. With the death of Peter Bernstein, that microscopic portion of the financial field has been measurably diminished. While I see few today in a position to replace him, I hope and pray we shall see his like again.

That I’ve been reading his regular “Economics and Portfolio Strategy” essays for as long as I can remember may not be surprising—I’m often told that my reading list is ridiculously long (and I’d be hard-pressed to disagree). But of all of the publications I read, his is the only one of which I’ve saved every copy. I’ve also read—and have in my library—all of his books, including Capital Ideas, The Power of Gold, Against the Gods, Wedding of the Waters, and all the rest, a remarkable output in and of itself, even more remarkable in the range of its subject matter (the Erie Canal, for heaven’s sake!). It is hard to imagine the volume of research he must have invested in each one of his books.

Replete though the record of his works may be, the man behind all of those words was a warm, witty, and wise human being. I’ve known Peter for some three decades, worked with him at industry events, discussed with him the issues of the day, and even had the temerity to challenge his thinking and debate these issues with him.

Nonetheless, when in 2003 he declared that “Policy Portfolios Are Obsolete”—favoring instead a policy of short-term opportunism using many unconventional asset classes—I fear that my elbows may have been a bit sharp, and I fired back. In a speech before The Investment Analysts of Chicago, I described his new position as “wide of the mark, even ill-begotten,” words that may have overstated my convictions in this field where uncertainty is the watchword.

Peter handled my criticism with equanimity and respect, but his kind response did little to ease my feelings of guilt (not about my convictions themselves, but about how I expressed them). So I offered a peace-pipe of sorts and sported Peter and Barbara, his wonderful wife and omnipresent partner, to a delightful luncheon. (He chose the tony Hotel Pierre. I winced when the check arrived, but felt good about paying the bill!) When we parted company, we were better friends than ever.

Generous Grace

But for me, the substance of Peter was much more than his incredible range of accomplishments. The descriptive phrase that best describes him is generous grace. How many writers of essays, and studies, and papers, and books in our profession did Peter inspire with his endorsements, his compliments, his encouragement—and even his use of a keen editorial pen? Scores of us were the beneficiaries of his comments, public and private, and I was surely among the most favored. As author and journalist James Grant (Grant’s Interest Rate Observer) wrote, “Bernstein’s books were remarkable achievements. Better still, to their recipients, were the notes of friendship, encouragement and praise that he dashed off whenever his generous spirit moved him. He must have written a million of them.”²⁴²

When I wrote my first book (Bogle on Mutual Funds) in 1993, Peter’s back-cover endorsement read, “This book sets the standard for all how-to-invest books . . . even over Benjamin Graham’s The Intelligent Investor.” (Peter, bless his soul, was not above hyperbole!) And in endorsing my 2008 book, Enough, he created his own new title, Never Enough of Jack Bogle. (Ditto on the hyperbole.)

But it was more than a generous and encouraging sprit that Peter offered in his accolades. He also offered a remarkable perspective, seeing things that others (including we authors ourselves) may have missed. These excerpts from his foreword to my Common Sense on Mutual Funds (1999) set the stage for a profound insight into the growing structural problems that would be faced by the mutual fund industry.

Why this book is unique: Jack Bogle has written a book on investing unlike any investment book that I have ever encountered, because he discusses sensitive matters that other authors ignore. I hesitate to speculate on why these topics receive such short shrift elsewhere, but I suspect that other experts have horizons that are more limited than Bogle’s, or they have less concern for their readers’ best interests. . . .

 

Despite all the high-minded talk we hear from the corporate spinmasters, conflict of interest between seller and buyer is inherent in our economic system. Jack Bogle’s goal was to build a business whose primary objective was to make money for his customers by minimizing the elements of that conflict of interest. . . . That has been no easy task. The complexity of the job that Bogle set out for himself, however, has enabled him to look at the competition with a very special kind of eye. One of the loud and clear messages in this book is that he is less than pleased with what that eye sees.

 

We must look at the investment management industry (yes, it is an industry even more than it is a profession) as a business and within the framework of the economic system as a whole. . . . Bogle’s skill in dispensing uncommon wisdom about how to invest and how to understand the capital markets would be reason enough to read these pages. But the big message in this book is that what happens to the wealth of individual investors cannot be separated from the structure of the industry that manages those assets.

On the Shoulders of a Giant

We all need strength to carry on. Peter Bernstein’s generous grace gave those of us who write and think about investing the strength not only to keep going, but to keep going in the direction of truth and reason. That is, for me, his greatest legacy, even greater than his own preeminent intellectual standing and his prodigious outpouring of words and ideas, all impeccably organized and articulated with precision. (He would have it no other way.)

When we stand on the shoulders of Peter Bernstein, as do many of us in the world of finance—practitioners, academics, essayists, authors—we stand on the shoulders of a true investment giant of our era. While those shoulders are no longer there for us in physical form, they remain in spiritual form, ever available to support us, and to provide perspective, wisdom, and inspiration for generations yet to come.