Nobel laureate Harry Markowitz was a giant of academic finance. But ROBIN POWELL will remember him as a kind and humble man who put his success and fame into healthy perspective.
There are probably only two people who can claim to have genuinely changed investing. One of them was Jack Bogle, and the other Harry Markowitz. Bogle died in January 2019, and now we’ve lost Markowitz too, at the age of 95.
It was in 1952 that Markowitz turned investing on its head with the publication of his dissertation Portfolio Selection. Until then, financial professionals assumed that the best equity investment strategy was simply to choose the shares of a group of companies that were thought to have the best prospects.
Markowitz showed that far more important than the individual securities within a portfolio was the portfolio itself, and, specifically, the extent to which the performance of those securities correlated with one another.
The key to successful portfolio construction, argued Markowitz, was diversification, which he described as “the only free lunch in investing”. This common-sense (but at the time radical) approach became known as Modern Portfolio Theory.
The theory won him the Nobel Prize in Economic Sciences, and, up to this day, more or less all portfolios have been built, at least to some extent, on MPT.
“The smart investor buys and holds index funds”
I had the pleasure of interviewing Harry Markowitz in San Diego in November 2017, and asked him what advice he would give to ordinary investors. You can read what he had to say in more detail here, but most people, he said, should take the advice he would give to his friend Monica at Elijah’s, his local deli.
“She asks me how to invest,” he told me, “and I say, take half your money and put it in a savings account and take the other half and put it in a well-diversified equity portfolio with Vanguard and leave it.
“There are two kinds of people — ill-advised and well-advised. The ill-advised watch Jim Cramer yell at them on CNBC. I may be enthusiastic but I don’t yell advice. The smart investor just buys and holds a well-diversified portfolio, using index funds.”
Markowitz never lost the common touch
But what struck me most about Harry Markowitz was that academic finance was just part of his life. Yes, he loved his work — he was writing a book when I met him — but he loved life too. And although of course he became a wealthy man, he wasn’t one to sit in an ivory tower.
He would go to his local bagel store every day to enjoy a coffee, watch the world go by, and read philosophy; indeed he always saw himself as more of a philosopher than a finance professor.
Although, in his later years, to reduce his cholesterol, he switched to a healthy diet of vegetables, fruit and fish, he also put his longevity down to enjoying simple pleasures, saying “if you can’t have a good piece of beef fat around a steak or prime rib once in a while, you can forget it!”
Markowitz admitted to me he had hoped to win the Nobel Prize but thought he’d missed his chance when James Tobin, whose work on portfolio theory came after his, won the prize in 1981. It was, he said, a defining moment in his life.
“(My wife) Barbara and I went for a long drive in the country,” he recalled. “We found a big five-and-ten-cent store in the middle of a little town and we had an ice cream cone. I said OK, I’m ready to rejoin the real world. And I didn’t think about it again until I got a call in Japan (in 1990) from a television station saying, you’ve just won the Nobel Prize.
“I’m still surprised (I won). It was not my intention to become a great economist and have a favourable impact on the lives of hundreds of millions of people. Like I said, I was a philosopher.”
“I think I’ve lived a good life”
Philosophy, Markowitz said, helped him to understand the world, and his own role in it. His two favourite philosophers were Descartes and Hume.
“(But) the greatest philosopher ever, in my mind, is Aristotle,” he said. “He spoke of eudaimonia, which means living a good life, so that people think well of you after you are dead.
“Think of Charles Dickens and the Scrooge tale. Scrooge sees the Ghost of Christmas Future, and what really gets to him is that no one attended his funeral. And he says, that’s enough, I’ve got to be a good guy, I’ve got to help Tiny Tim. He went from non-eudaimonia to eudaimonia.
“I think I’ve lived a good life,” he said, after a moment of reflection.
I think we can all agree he did.
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