The Rational Reminder Podcast Episode 328 - Prof. Stephen R. Foerster: Pursuing the Perfect Portfolio
Modern vs. Historical Investing
- Modern investing blends money, mathematics, and investment theories.
- This scientific approach contrasts with the historical "art" of investing, which relied more on intuition and individual stock picking.
Markowitz's Diversification Theory
- Harry Markowitz introduced the concept of diversification, emphasizing the importance of balancing risk and return.
- He demonstrated that combining uncorrelated securities reduces portfolio risk more than the average risk of individual stocks, the only "free lunch" in investing.
Markowitz's Concerns About Misuse of MPT
- Markowitz criticized financial advisors who misused his modern portfolio theory to justify risky tech-heavy portfolios during the dot-com bubble.
- He clarified that his theory didn't require assuming normal distribution of stock returns, contrary to some interpretations.
Have you ever wondered how the world's top financial thinkers shaped the way we invest today? In this episode, Ben and Cameron sit down with Professor Stephen Foerster from the Ivey Business School to explore the evolution of modern investing. As a distinguished financial expert and co-author of In Pursuit of the Perfect Portfolio, Professor Foerster dives into the groundbreaking work of financial pioneers like Harry Markowitz, Bill Sharpe, Gene Fama, and others, unpacking their remarkable contributions to portfolio management, risk assessment, and market efficiency as we know it today. Tuning in, you'll gain a deeper understanding of Markowitz's revolutionary diversification theory, Sharpe's introduction of beta as a risk measure, and Fama’s Efficient Market Hypothesis, as well as each of their perspectives on the “perfect portfolio,” tying together the history, theory, and practical application of modern investment strategies. Whether you're looking to sharpen your strategy or build your investment knowledge from the ground up, this conversation with Professor Foerster is packed with actionable takeaways and fascinating stories that could change the way you approach your financial future. Don’t miss this opportunity to learn from the thought leaders who shaped the market!
Key Points From This Episode:
(0:03:29) Contrasting the historical art of investing with the modern science of investing.
(0:04:44) Markowitz’s diversification theory and the importance of balancing risk and return.
(0:09:39) Sharpe’s capital asset pricing model (CAPM) and his contribution to measuring risk.
(0:16:13) Insight into Fama’s Efficient Markets Hypothesis and the joint hypothesis problem.
(0:19:13) The rise of factor investing and the significance of Fama-French’s three-factor model.
(0:23:26) Unpacking Shiller and Fama's main point of disagreement on bubbles.
(0:26:50) Bogle’s perfect portfolio and persistence about the index fund, despite resistance.
(0:29:37) How the Black-Scholes-Merton (BSM) option pricing formula changed the world.
(0:34:37) Ways that Merton contributed to portfolio theory and his take on TIPS.
(0:36:20) Key takeaways from talks with Martin Leibowitz, Charlie Ellis, and Jeremy Siegel.
(0:37:35) An interesting analogy for Professor Foerster’s take on the “perfect portfolio.”
(0:40:53) Correlation vs. causation in stock pricing and how it applies to factor investing.
(0:46:38) Examples of masterly inactivity and investor lessons from Madoff's Ponzi scheme.
(0:52:07) The dangers of FOMO, a SPACs cautionary tale, and lessons from value investors.
(1:00:43) Winning at tennis vs. investing and risks of over-reliance on automated decisions.
(1:06:02) Long-term lessons from pioneers in finance to improve investment strategies today.
Links From Today’s Episode:
Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://x.com/RationalRemindRational Reminder on TikTok — https://www.tiktok.com/@rationalreminder
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — info@rationalreminder.caBenjamin Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Cameron Passmore — https://pwlcapital.com/our-team/
Cameron on X — https://x.com/CameronPassmore
Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/
Professor Stephen Foerster — https://stephenrfoerster.com/
Ivey Business School — https://www.ivey.uwo.ca/
Stephen Foerster on LinkedIn – https://www.linkedin.com/in/stephen-foerster-26b85319/
Stephen Foerster on X – https://x.com/profsfoerster
Stephen Foerster Books — https://www.amazon.com/stores/author/B001KDO1L0
‘Cristiano Ronaldo snubbed Coca-Cola. The company’s market value fell $4 billion.’ — https://www.washingtonpost.com/sports/2021/06/16/cristiano-ronaldo-coca-cola/
Books From Today’s Episode:
In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest — https://www.amazon.com/dp/0691229880
Trailblazers, Heroes, and Crooks: Stories to Make You a Smarter Investor — https://www.amazon.com/dp/B0DHLVYK1Q
In Pursuit of the Unknown: 17 Equations That Changed the World — https://www.amazon.com/dp/0465085989
A History of Interest Rates — https://www.amazon.com/dp/0471732834
Winning the Loser's Game: Timeless Strategies for Successful Investing — https://www.amazon.com/dp/0071813659
Stocks for the Long Run — https://www.amazon.com/dp/1264269803/
Extraordinary Tennis For The Ordinary Player — https://www.amazon.com/dp/0517511991
Papers From Today’s Episode:
‘Efficient Capital Markets: A Review of Theory and Empirical Work’ — https://doi.org/10.2307/2325486
‘The Loser’s Game’ — https://doi.org/10.2469/faj.v31.n4.19
'The Pricing of Options and Corporate Liabilities’ — https://doi.org/10.1142/9789814759588_0001