Robert Arnott recently interviewed Nobel Prize Winner, Harry Markowitz, one of the deans of Modern Portfolio Theory, to answer the question, "Did Diversification Fail?" This first part is followed by 4 additional segments 3-6 minutes in length. Given that Fundamental Indexing has been outperforming Cap Weighted Indexing in recent history, these 5 video segments make for some interesting viewing/listening.
Click here or on the image below to view this video:
In the interview, Markowitz shared these thoughts:
- 2008 was not an outlier year, as it wasn't the worst year in markets;
- in fact, it was tied for the second worst year.
- 2008 was just short of 2.5x standard deviation move
- moves of 2x SD to the left of the curve (the bad tail risk) should only happen 2.5% of the time
- that's one year in 40, "I've been in the business for 58 years, so I've got to expect a one year in forty move once in a while."
- There ARE daily 'black swans,' but so far there haven't been annual 'black swans' [in the U.S., he adds].
- people say, in crises like 2008, all asset classes lose money ... therefore diversification has failed [that's not quite true]
- government bonds went up
- corporate bonds went down 5% (net basis)
- the S&P 500 went down 38%
- emerging market equities went down 50%
- therefore, depending on whether you were high up in the efficient frontier in equities, or low and heavy in bonds, you got hit hard or not so hard
- that's why its so important to pay attention to where you are on the efficient frontier.
This is followed upon by 4 more segments (click on images to view):
The Capital Asset Pricing Model
(Length:6:18 )
The Efficient Market Hypothesis
(Length 2:22)
Harry's Heroes
(Length 3:29)
The Fundamental Index Approach
(Length 3:03)
