Investment Theory

Fisher Black and the Revolutionary Idea of Finance – Perry Mehrling
“Markets look a lot more efficient from the banks of the Charles than from the banks of the Hudson”, the late Fisher Black noted when he moved from M.I.T. to Wall Street. This book is a fascinating historical account of a practitioner who helped introduce scientific methods (CAPM) to transform investment management over the ensuing 30 years. Fisher Black’s special genius was for developing models that helped people organize their thinking about the more difficult real world: both CAPM and the Black-Scholes option pricing model provide a rational account of a world in which volatility is constant. But is it? Read more.. 

The (Mis)Behavior of Markets - Benoit Mandelbrot
Market prices often leap, they don't glide. In other words, markets are much more risky than standard finance theory suggests. Applying the fractal theory from physics to finance, Mandelbrot challenges the assumption of continuous prices and contends that price dislocations are actually “normal” and bubbles can be entirely rational. He also illustrates how market turbulence (and bad news) clusters and how no investment horizon inherently differs from another: volatility “scales” the same over hours or decades. Indeed, as many investors have learned during the credit crunch, averages and standard deviations work well in models but are poor measures of risk in the real world. Read more..

Pioneering Portfolio Management –  David Swensen
In this investment classic, David Swensen preaches a long-term investment horizon and diversification into alternative asset classes. Institutions across the globe now all want to be Swensen and it’s obvious why: during his fifteen years at the Yale Endownment he achieved an annualized return of 17.4%. We illustrate our investment thesis for Theta Deep Value Fund with a quote from his book: “Intelligent acceptance of illiquidity and a value orientation provide a sensible, conservative foundation for portfolio management”. Read more..