Peter Bernstein, Risk-Management Pioneer, Passes Away at 90

I report with sorrow that Peter L. Bernstein, all of whose books I have on my shelf, has passed away at the age of 90. The WSJ has a lovely obituary by Jason Zweig today.

Investing has yielded a few stars so famous they are known by first name. Warren Buffett is one. Peter L. Bernstein -- the economist, investment consultant and prolific author who died on June 5 at 90 -- was another ....

In his almost 70-year career, he taught economics at Williams College, worked as a portfolio manager at Amalgamated Bank and ran the investment-counseling firm of Bernstein-Macaulay, co-founded by his father and Frederick Macaulay, who invented the modern discipline of bond investing.

In 1974, as Wall Street was suffering its worst market decline since 1929, Mr. Bernstein co-founded the Journal of Portfolio Management to improve risk management with insights from academic research.

His introduction to the maiden issue reads as if it were written yesterday: "How could so many have failed to see that all the known parameters were bursting apart?...It was precisely our massive inputs and intimate intercommunication that made it impossible for most of us to get to the exits before it was too late."

He was the author of 10 books, five of which he published after the age of 75. Two of them, "Capital Ideas," a history of modern finance, and "Against the Gods," a dazzling survey of probability and risk, were international best sellers. With his wife and business partner, Barbara Soskin Bernstein, Mr. Bernstein also published "Economics & Portfolio Strategy," a biweekly newsletter.

Bernstein was one of those gifted finance economists who effortlessly bridged the divides of Wall Street, government service at the Fed, the academy - but was best known to the broader reading public as the author of several wonderful books on risk and finance. And note, five of the ten books that Bernstein authored were written after he was 75; I have always taken a certain comfort in that. While it is true that many of today's leading economists also bridge those divides, Bernstein was part of an older generation that was primarily rooted in the practice of finance on Wall Street first, and the academy only second - in today's world, it is typically the other way around, and the backing of theory onto Wall Street rather than practice into the academy is not always a happy endeavor, at least for investors, as we found to our sorrow in the LTCM debacle.

Of Bernstein's books, the one that has always remained highest on my list is his intellectual history of the idea of risk and its measurement, Against the Gods. I reviewed that book in the Times Literary Supplement when it first came out - having convinced the then-editor, Ferdinand Mount, that this was more than just a business advice book, but genuine intellectual history. (I combined the review with a technical book on derivatives (I began life as a tax lawyer doing the first wave of derivatives) by the editor of the trade journal, Risk, on the double edged sword we call 'leverage', and it is one of those book reviews that has stood up pretty well over the past dozen years, still readable and still relevant; I've posted the review at SSRN.

Bernstein possessed a certain practical sense of someone who was extremely sophisticated and quantitatively adept, having a healthy respect for what risk analysis can do, and an even healthier respect for what it can't. In that, he was part of a generation of older Wall Street financial analysts who, whatever their politics and policy commitments, shared a common culture that embraced quantitative risk analysis while remaining apart from a belief that it can predict the future. George Soros and Henry Kaufman are others of that generation and that inclination. I recall a conversation with George Soros, in Moscow no less, at the time of the LTCM meltdown in the late 1990s, in which he said - I paraphrase, but not by much: "Every ten years the quants come up with a new version of the old thing, and then it breaks down and causes a panic; afterwards everyone can see so obviously why it went wrong, but that doesn't stop another version of it a decade later." Why a decade? Because that's "how long it takes for the important players to forget what happened the previous time around." And regarding the LTCM breakdown, Soros shrugged and said to me later, once what had happened at LTCM was better known - "Even you, Ken, dealing with the foundation's affairs in Russia, would never have thought the possibility of Russian default on its sovereign bonds was effectively zero."

These were sentiments Bernstein surely shared. And yet Bernstein embraced and had an enormous intellectual interest in the currents of risk analysis and management that began sweeping the world in the 1970s - his books Capital Ideas and Capital Ideas Evolving spoke to that deep interest.

Here are two things that I took away from reading Peter Bernstein's gifted output over several decades; my formulations and views, of course, but I don't think he would have much disagreed:

First, much of finance consists of seeking to convert uncertainty into risk. Second, however, the nature of that conversion means that much of finance consists of trying to find a way to do exactly what mutual fund advertisements in the fine print say you shouldn't do, viz, predict future returns on the basis of past performance.

Somewhere in Against the Gods, Bernstein remarks that while 'reversion to the mean' is a powerful heuristic, it is not in fact a causal law of nature, and it cannot tell you when underlying causes have shifted so to cause a long term shift in the mean. Anyone think that observation is any less relevant today than in 1997?