- June 9, 2021
- Posted by: Stratford Team
- Category: Markets
- The book “In Pursuit of the Perfect Portfolio” profiles ten of the greatest investors of all time.
- From Harry Markowitz to Jack Bogle to Charles Ellis, each investor brings a unique perspective.
- These investing legends may have different investment ideas, but they all agree on one key rule.
- See more stories on Insider’s business page.
What if you could get inside the minds of some of the greatest investors in history?
It would be nice if you had a window straight into their heads, but in reality it would take years of hard work to learn to think the way they do.
You’d have to pore over countless pages of research, dissertations, academic journals and investing guidebooks. You’d need to dive into the lives of each investor, sifting through their early years and formative experiences in search of the seeds of their later genius. And you’d have to connect the dots between investors, noting the trends and investing environments each of them lived through and how they were related to one another.
Or, you could simply read Andrew Lo and Stephen R. Foerester’s new book “In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest.”
Their book, coming out on August 17, delves into the lives of ten of the greatest and most influential investors of all time.
Some of them you’re probably at least passingly familiar with: William Sharpe, creator of the Sharpe Ratio; Robert Shiller, of the Case-Shiller Index; and Jack Bogle, the creator of the first index fund are all household names in the investing world.
But others might come as a surprise to some readers. You may not know Harry Markowitz by name, but if you’ve ever invested then you’ve probably done so using some form of his Modern Portfolio Theory. You might not know who the Bond Guru is, but Martin Leibowitz’s impact on the bond industry is undeniable. And you may have never heard of Eugene Fama, but most investors have heard of his efficient market hypothesis, and all investors have felt its effects.
Along with Myron Scholes, Charles Ellis, Robert Merton and Jeremy Siegel, these brilliant men revolutionized the investing world, each in their own way. Lo and Foerester’s well-researched book explores how each of these investing titans went about developing the theories and strategies they used to invest successfully, and how readers can glean lessons and insights from their work.
The book explores each investor’s methodology individually and chronologically, providing the reader with a look into the subject’s early life, his career, and his eventual “aha” moment of investing inspiration.
But the true value of “In Pursuit of the Perfect Portfolio” comes from the authors’ consideration of how these investors’ ideas overlap. After all, by creating a venn diagram of each investor’s contributions to the investing world it seems likely that the “perfect portfolio” will reside somewhere in the middle, some combination of the best ideas from the best investors in history.
One investing rule they agree on
Unfortunately, the investors featured in this book won’t tell you to buy shares of one company over another in order to build your portfolio, and each has his own unique perspective on where you should invest your money.
However, there is one investing rule that is universally acknowledged by all ten men: when creating your portfolio, diversification is key.
This was, in essence, what Harry Markowitz discovered decades ago at the University of Chicago. Markowitz’s idea might seem almost quaint when viewed through the lens of history – for instance, in Chapter 3 the authors recount a story of a reporter asking Harry Markowitz if he had won a Nobel Prize in Economics for saying “don’t put all your eggs in one basket.” Markowitz simply replied “yes.”
But as the authors start with Markowitz and make their way through the work of the other nine investors in chronological order, it becomes clear just how powerful Markowitz’s ideas on investment diversification really were.
Each successive investor builds on the last, with Markowitz acting as the base that Sharpe, Fama, and all the rest iterate upon over the years. The result is that by the time we reach the final investor, Siegel, Markowitz’s realization that portfolio diversification reduces risk is accepted as inherently correct, and an essential idea for all investors to remember.
Where the best investors in the world put their money
As for what exactly to invest in, there are three investment vehicles that most of the investors profiled in this book agree are an excellent place for anyone to start.
Index funds are a top pick, especially for the earlier investors like Sharpe who espouse the idea of a market portfolio – that is, one that bundles together all of the assets available on the market, in order to mirror the market’s returns.
While Sharpe was a big proponent of a market portfolio, it was Bogle who took the idea of investing in the broader market and ran with it, creating the first index fund in 1976. Bogle’s mindset is encompassed in a quote in the book: “stop trying to find the needle. Invest in the haystack. Own the entire US stock market.”
While Bogle focused his index investing in the US, advising that investors only allocate about 20% of their portfolio to international equities, that’s not the only option available.
Jeremy Siegel believes that low-cost index funds should make up the majority of your portfolio, but at least one-third of your portfolio should be invested in international stocks. Charles Ellis is also a big fan of index investing, but he recommends investing in a variety of index funds such as bond index funds and low-cost international index funds. One such fund referenced in the book is the MSCI EAFE index.
Another option the best investors in the world like is ETFs.
Despite the fact that ETFs are a relatively new investment vehicle, with the first premiering in 1990, Markowitz, the earliest investor profiled in the book, is a big fan. He likes the diversification that low-cost ETFs can provide, and he recommends mixing them with individual bonds in your portfolio.
Sharpe is another fan of ETFs, though he advises mixing and matching them with index funds in order to create your own personal market portfolio. In the book he “recommends a US total stock market fund, a non-US total stock market fund, a US total bond market fund, and a non-US total bond market fund for this component of the Perfect Portfolio, with an additional suggestion of currency-hedged global funds.”
While not mentioned in the book, these four ETFs are examples in the aforementioned categories: Vanguard Total Stock Market ETF (VTI), Vanguard Total International Stock ETF (VXUS), Fidelity U.S. Bond Index Fund (FXNAX), and Fidelity International Bond Index Fund (FBIIX).
Finally, the most widely agreed-upon investment among the people profiled in this book are TIPS, or Treasury Inflation-Protected Securities. These bonds issued by the US Treasury provide investors protection against inflation, and even allows investors to profit from it, which is suddenly a very appealing idea indeed.
Combining the diversification of index funds and ETFs with the risk-free protection TIPS provide is an excellent way to begin building your perfect portfolio – at least according to ten of the greatest investors in history.