📖Capital Ideas: The Improbable Origins of Modern Wall Street — The Birth of Modern Financial Thought on Wall Street

Let me take you into the "heroic era" of finance.

🌍 Preface: Why should you watch "Capital Ideas"?

Hong Kong residents frequently hear terms like "portfolio," "efficient markets," "derivatives," and "risk management" when investing in stocks and real estate, but few truly understand the underlying concepts. Peter L. Bernstein's book , "Capital Ideas," specifically explores the birth and development of modern financial theory .

The first time I read this book, it felt like watching a biographical film about the financial world. It features a group of mathematical geniuses, economists, and practical investors, explaining how they challenged conventional "investing by gut instinct" thinking with theory, ultimately laying the foundation for how Wall Street works today. For Hong Kongers, this book is like a "history of the founding of finance." After reading it, you'll understand why the market works the way it does today.

📘 Book Background

• Author : Peter L. Bernstein (1919–2009), a leading authority on financial history
• Publication Date : 1992
• Topics : The origins of modern investment theory, the integration of mathematics and finance, and the ideological revolution on Wall Street
• Features : Using storytelling to transform the profound financial mathematics into a biography + historical drama

The author himself is not a mathematician, but he has the ability to explain a bunch of complex theories in a simple and easy-to-understand way, like a storyteller 📖, leading readers to meet the "superstars" in the financial world.

🧠 Theme 1: Theory vs. Intuition

In the past, many investors relied on intuition and experience, believing that market manipulation was an art form. However, modern financial theorists believe that markets actually have patterns that can be explained using mathematical models.

👉 My take: It's like Hong Kong retail investors trading stocks. Some say, "I feel the Hang Seng Index is going to rise," but on the other hand, some scholars use statistical models to calculate returns and risks. This duel ultimately changed the world of investing.

📊 Theme 2: Theoretical Heroes

1. Harry Markowitz

• He proposed the "Modern Portfolio Theory" 📈, emphasizing the use of diversified investments to reduce risk.
• This theory directly changed the way funds are managed.

👉 Hong Kong application: No one should go "all in" on buying a property or a single stock. Diversification is the key.

2. William Sharpe

• Proposed the Capital Asset Pricing Model (CAPM)📐.
• By expressing risk and return using mathematical formulas, the "Sharpe ratio" was introduced to measure investment effectiveness.

👉 Application in Hong Kong: Many fund managers mention the Sharpe ratio in their reports, and this master is the credit behind it.

3. Eugene Fama

• Proposed the "Efficient Market Hypothesis" (EMH)📊.
• Believing that market prices already include all information, no one can "win the market" in the long run.

👉 Hong Kong Application: Many retail investors often dream of how to “beat the big guys”, but if they believe in Fama, it’s basically a pipe dream.

4. Other heavyweights

• Fisher Black & Myron Scholes: Proposed option pricing model that changed the derivatives market.
• Franco Modigliani & Merton Miller: Capital structure theory, explaining corporate financing strategies.

📈 Theme 3: Revolution on Wall Street

"Capital Ideas" tells how academic theory is transformed into practical application, ultimately influencing the operations of funds, investment banks, and insurance companies.

• The theory was initially unpopular because the investment community found it too abstract.
• But with the development of data and computer technology, mathematical models have become the core tools of financial institutions.
• Wall Street has changed from "art" to "science" ⚙️.

👉 Editor's perspective: The Hong Kong financial industry is the same. From the past "scam stocks + street trading" to today's AI trading and quantitative investment, these theories are the underlying support.

🏛️ Topic 4: The Limitations of Theory and Human Nature

In his book, Bernstein warns that despite powerful theories, the market is not pure mathematics. Human greed, fear, and herd mentality will always cause the market to deviate from the formula.

👉 My understanding is that the Hong Kong property market is the most relevant. No matter how you count, people will still push up prices because they are "afraid of not being able to afford it."

🌟 Editor's summary

"Capital Ideas" is not a book that teaches you how to trade stocks, but a "history of financial thought".

• Wondering why fund managers keep talking about "diversification"? 📊
• Wondering why there are "Sharpe Ratio" and "CAPM"? 📐
• Wondering why Wall Street has become so dependent on mathematical models? 🔢

👉 The editor summarizes in one sentence: This book is the "Heroes List" of the financial world, introducing you to a group of investment thinkers who use mathematics to change the world.

📑《Capital Ideas》Hong Kong Apps Quick Guide

I've applied the financial theories in "Capital Ideas" to Hong Kong life and investment scenarios. You'll understand how to use them once you read them! 📘

📊 Portfolio Theory (Harry Markowitz)

• Core concept : Diversification can reduce risk.
• Hong Kong Application :
  • Don't go all in on a single Hong Kong stock, such as Hang Seng or Tencent.
  • You can diversify into Hong Kong stocks + US stocks + ETFs + bonds + gold.
  • It is not even advisable to put all your assets in the property market, as fluctuations in Hong Kong property prices are a systemic risk.
    👉 Editor’s tip: It’s not about “the more the better”, but rather choosing assets with “low correlation” to combine.

📐 Capital Asset Pricing Model (CAPM) by William Sharpe

• Core concept : The higher the risk, the higher the return should be; it is important to look at the correlation between the asset and the overall market (β value).
• Hong Kong Application :
  • If the rise and fall of the Hang Seng Index will significantly affect a certain stock, then the beta value of such a stock is high and the risk is also high.
  • Utility stocks that pay stable dividends (such as electricity and gas) have low beta values ​​and are more resilient to market downturns.
    👉 Editor's tip: When investing in the stock market, you should assess your risk tolerance rather than blindly chasing high returns.

📈 Efficient Market Hypothesis (EMH) by Eugene Fama

• Core concept : Market prices already include all information, and no one can "win the market" in the long run.
• Hong Kong Application :
  • Retail investors are always looking for "insider information" or "must-rising stocks", but if you believe in efficient markets, you have to accept that "it is difficult to outperform the market in the long term."
  • This theory supports "passive investing": for example, buying Hang Seng Index Funds (ETFs) and holding them for the long term.
    👉 Editor's Tip: If you're not a professional investor, buying ETFs might be a safer bet than investing in stocks.

📉 Derivatives and Options Pricing (Black-Scholes)

• Core concept : Mathematical models for calculating option prices have led to explosive growth in the derivatives market.
• Hong Kong Application :
  • Hong Kong's options market is active, but for retail investors, the risks are extremely high.
  • Many people lose a lot of money because they ignore volatility and leverage risks.
    👉 Editor's tip: If you're not familiar with the model, don't mess around with options. Use the simple "buy call options as insurance" approach instead of "naked selling."

🏠 Lessons from the Hong Kong Property Market

• From the perspective of diversified investment theory: Hong Kong people have 90% of their assets invested in the property market, which is actually very risky.
• From the perspective of the efficient market hypothesis: housing prices have already reflected supply and demand information, and long-term upward trends may not be reasonable.
• Using CAPM to look at it: The beta value of the Hong Kong property market may be higher than that of the stock market because it involves policies and global capital flows.
  👉 Editor's tip: Don't think the property market is a "sure-win investment"; calculate the risks instead of just focusing on returns.

🧠 Editor's Summary

You can understand how “Capital Ideas” landed in Hong Kong:

• Stock trading : Use CAPM to measure risk and use portfolio theory to diversify investments.
• Buying a property : Treat it as a high-beta asset, not a zero-risk one.
• Buying funds : Passive investing (ETFs) may actually be more consistent with the efficient market hypothesis than active stock trading.
• Options : A high-risk, high-return tool. Without model support, it is like gambling with your life.

👉 Editor's note: "Capital Ideas" reminds Hong Kong people that investing is not based on intuition, but must be supported by mathematical empathy.