Asked if he’s offended when people trash his investment ideas, Harry Markowitz chuckles like a kindly uncle. The founder of Modern Portfolio Theory replies that he’s in the videoconferencing business. From his San Diego office, he delivers lectures around the globe for $15,000 a pop. Markowitz lets audiences choose from a handful of nontechnical topics — among them, whether his influential blueprint for portfolio construction stopped working during the crash of 2008.
“My business has been brisk in explaining why Modern Portfolio Theory is still correct,” he says.
At 82, Markowitz is still dining out on the slim 1952 paper that changed finance forever — and won him a Nobel Memorial Prize in Economic Sciences. Written when Markowitz was a graduate student at the University of Chicago, this document contains a formula for building a diversified portfolio that delivers the best return for a certain amount of risk. A mathematical expression of the old adage “Don’t put all your eggs in one basket,” Modern Portfolio Theory, or MPT, is still widely used almost 60 years later because the logic behind it makes so much sense.
As Markowitz admits, though, MPT has taken plenty of knocks along the way: “For years — maybe almost from the beginning of [Modern] Portfolio Theory — there have been people who’ve been saying, ‘Well, that’s obsolete. We’re going to do something new and better.’”
This chorus has grown louder since 2008. According to critics, diversification offers little protection against markets plunging in lockstep. It may be the right thing to do in normal conditions, they say, but it fails exactly when you need it the most, during times of crisis. ....