It was clear thinking, not the math, that made the Dietz method a breakthrough

The Dietz Method is a basic element of every investment analyst’s education, and lies behind just about every one of the millions of performance calculations carried out every day. Taken as a given in today’s investment world, it was not always seen as obvious.


Remembering Peter Dietz

Recently, a few Russell long-timers gathered in Seattle to honor Peter Dietz, an occasion sparked by David Spaulding (founder and publisher of the Journal of Performance Measurement) swinging by to commemorate Peter’s 2013 induction into the Performance & Risk Measurement Hall of Fame.

Although I must confess to never having previously heard of the Performance & Risk Measurement Hall of Fame, I greatly enjoyed the get-together. Peter—who died in 1990 at the age of just 54—worked at Russell for many years and was the company’s first Director of Research, but he is best known for having come up with the formula that is now almost universally used as the basis for calculating the rate of return on investment portfolios.

That formula (reproduced above) is not exactly rocket science. As George Russell put it: “Peter’s actual performance measurement formula is fairly simple arithmetic. What distinguished it as a breakthrough insight was the clarity of thought it took to define the problem correctly, so the solution that Peter presented appeared to be simple and elegant.”¹

Today, the Dietz Method is easy to take for granted and it’s hard to imagine it ever having been controversial. But what is obvious to us today was not obvious when it was first produced. Even the use of market value as the basis for the calculation was a major sticking point.

George’s observation strikes me as one that could be applied to any number of breakthrough insights. Lots of people can do math, but the true challenge often lies in knowing what the right math to do is. Simple, well-designed models are always to be preferred over the unnecessarily complex.


¹ George F. Russell Jr., with Michael Sheldon (2010). “Success by Ten.” John Wiley & Sons. p. 35.
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