A giant in the field

August 7, 2023

We admit it. We were going to do a story about scammers but in the past few weeks the topic has reached saturation point. It is the subject of a TV series, and more than that, the electronic society in which we all live has been blitzed by scammers who make the whole field of online commerce and banking fraught with risk.

But a more significant story overshadowed our editorial decision-making: the death at age 95 of economist Harry Markowitz. Talk about risk.

Markowitz, born in 1927,  grew up in fairly humble circumstances as the only child of Morris and Mildred Markowitz, owners of a small grocery store in hard knuckled Chicago. Harry was a brilliant student and he later attended the University of Chicago where he focused on classical philosophers including David Hume who in the 18th Century argued that even with the perspective of the past, humanity cannot rationally dictate or determine future events because thoughts of the past are limited in scope compared to the boundless possibilities of the future.

This fascinated Markowitz who was considering the question posed by seemingly rational investors: where should I park my wealth? At issue was the tug of war between risk and reward.

Up to that point stock market strategies were dominated by the strategy of picking winners – buying shares in companies that had seemingly the brightest prospects. It was a narrow focus, only on returns.

His insight was to pay more heed to the risks of investing, and to take a portfolio approach to investment decision making. In short, he gave birth to the whole notion of Modern Portfolio Theory, an approach that utterly dominates the investment sector today.

His paper, “Portfolio Selection” successfully argued that investors could achieve better results by choosing a wider mix of assets that seek growth but also by choosing assets that recognise the investor’s tolerance of risk. The key to doing that is to diversify.  In doing so, the investor can actually push the risk/return envelope and achieve good returns but with minimised risk. His work is the basis of the mantra of “not putting all your eggs in one basket”, but more importantly how many eggs we should assign to the different baskets in a structured manner.

According to the New York Times, which published a glowing obituary on June 25th, when in 1955 Markowitz submitted his paper for a PhD (under the supervision of Milton Friedman) he was subjected to a nerve-wracking joke. Friedman bluntly told Markowitz that while he and the academic panel could find no mistakes, the topic was extremely novel. “We cannot award you a Ph.D. in economics for a dissertation that is not economics,” he said. Markowitz was told to wait outside the office for 5 minutes, during which he admitted getting sweaty palms. This after being so confident of his dissertation.

Finally, the NYT article reports, a panel member emerged and said, “Congratulations, Dr. Markowitz.”

This sigh of relief has echoed throughout the investment world, and his influence has been profound. For readers of this newsletter or anyone who has discussed investments with us will be knowingly or unknowingly benefitting from Harry Markowitz’s insight. His approach to risk basically made the world of investment accessible to the public.

Markowitz continued studying portfolio management theory, the field he pioneered, and he also developed a deep interest in Behavioural Economics: examining the sometimes illogical or irrational choices people make when they can’t see into the future.

He won a 1990 Nobel Prize in Economic Sciences -  an acknowledgement of the contribution he made to the field. He was a Giant.