Harry Markowitz, Modern Portfolio Theory Pioneer, Dies at 95

[roi2020]

Harry Markowitz, the Nobel-winning economist renowned for developing Modern Portfolio Theory,
died on Thursday in San Diego. Mr. Markowitz was 95. May he rest in peace.

"Until Dr. Markowitz came along, the investment world assumed that the best
stock-market strategy was simply to choose the shares of a group of
companies that were thought to have the best prospects."

"But in 1952, he published his dissertation, 'Portfolio Selection,' which
overturned this common sense approach with what became known as modern
portfolio theory, widely referred to as M.P.T."

"The heart of his research was grounded in the basic relationship between risk and
reward. He showed that the risk in any portfolio is less dependent on
the riskiness of its component stocks and other assets than how they
relate to one another. It was the first time that the benefits of
diversification had been codified and quantified, using advanced
mathematics to calculate correlations and variations from the mean."

Link

An interesting side note pertaining to behavioral economics.
Jason Zweig interviewed Prof. Markowitz in 1997 regarding his portfolio asset allocation in the mid-1950s.

Mr. Markowitz responded:
"I should have computed the historical co-variances of the asset classes and drawn an efficient frontier.
Instead, I visualized my grief if the stock market went way up and I wasn’t in it – or if it went way down and I was completely in it.
My intention was to minimize my future regret. So I split my contributions 50/50 between bonds and equities."
Link

[steadyeddy]

May Mr. Markowitz RIP. The longer I invest the more convinced I have become of buying the whole haystack rather than slicing and dicing.

I also agree that it is important to pick assets that relate well to one another - in terms of risk/reward, volatility etc.

[steelpony10]

steadyeddy ,

       Funny you mentioned a haystack.

       I was explaining what I liked to do in markets once and why. I used a salad as an example

       You can cut up your salad In as many pieces as you want but it will always just be a salad, (some investors should just stuff it in a blender) The point is you’re salad of holdings are still controlled every day by a numberless amount of possible events. It’s right there in front of you but you can’t eat any for a numberless amount of reasons brought on by those events.

        I chose to make values (in part) secondary to income. Whatever pops up I can still eat my chunks of salad and get my bowl refilled also. All hold various amounts of dressing. It’s bottomless within reason.

        As far as the OP, that later conclusion comes from the Bible. When in doubt split the difference to be half right. I found it a lot easier to work backwards from your personal goal then invest in the positions to get you there. Explained another way you plan a project then collect the tools to complete it.

[steadyeddy]

Jun 27, 2023 19:45:01 GMT steelpony10 said:

steadyeddy ,

       Funny you mentioned a haystack.

       I was explaining what I liked to do in markets once and why. I used a salad as an example

       You can cut up your salad In as many pieces as you want but it will always just be a salad, (some investors should just stuff it in a blender) The point is you’re salad of holdings are still controlled every day by a numberless amount of possible events. It’s right there in front of you but you can’t eat any for a numberless amount of reasons brought on by those events.

        I chose to make values (in part) secondary to income. Whatever pops up I can still eat my chunks of salad and get my bowl refilled also. All hold various amounts of dressing. It’s bottomless within reason.

        As far as the OP, that later conclusion comes from the Bible. When in doubt split the difference to be half right. I found it a lot easier to work backwards from your personal goal then invest in the positions to get you there. Explained another way you plan a project then collect the tools to complete it.

steelpony10, I continue to learn more about how you think about investing. Thanks for posting.

[steelpony10]

steadyeddy,

Ha. Ha. While my brain is still functional, thanks

[yakers]

Jun 27, 2023 20:29:04 GMT steadyeddy said:

Jun 27, 2023 19:45:01 GMT steelpony10 said:

        As far as the OP, that later conclusion comes from the Bible. When in doubt split the difference to be half right. 

Except when there is a baby involved?

[roi2020]

I stumbled across an informative article today discussing Markowitz's contributions to investment theory.


"Markowitz agreed with Williams’s approach to valuing individual investments.
It was far better than the old prudent man approach.
But Markowitz still saw it as incomplete.
The shortcoming: While it’s important to evaluate individual investments, it’s equally important —if not more so —
to consider how a collection of investments will work together in a portfolio.
Markowitz was the first, in other words, to show investors how to effectively diversify a portfolio."

"In his 1959 book, Portfolio Selection, adapted from his thesis, Markowitz provided this example:
'A portfolio with sixty different railway securities, for example, would not be as well diversified as the same size portfolio
with some railroad, some public utility, mining, various sorts of manufacturing, etc.
The reason is that it is generally more likely for firms within the same industry to do poorly at the same time than for firms in dissimilar industries.'”

"As noted above, today this might seem obvious.
But before Markowitz, it had never occurred to anyone.
And it wasn’t just a casual observation.
Portfolio Selection runs more than 300 pages and is dense with formulas.
In it, Markowitz provided a framework for building optimal portfolios —
those that offered either the maximum possible return for a given level of risk,
or the least possible risk for a given level of return.
Markowitz called these portfolios 'efficient,' and presented them visually in a diagram he called the efficient frontier."

Link