Harry Markowitz passed away this past weekend. He was a giant in the financial industry. Arguably THE giant. Names like Buffett and Bogle might be more recognizable to the common investor, but Markowitz had more influence on financial planning and asset allocation than any person in financial history. Markowitz is the the father of Modern Portfolio Theory and the basic building blocks of how most financial planners and portfolio managers think about asset allocation. The concepts in Portfolio Selection formed the foundation for how we think about diversification and “efficient” portfolio construction. These ideas helped contribute to the CAPM model, Efficient Market Hypothesis, numerous other asset pricing models, factor investing, indexing and behavioral finance. To this day these ideas remain the starting point for how most of us think about portfolio construction.
Markowitz’s ideas were so novel that his PhD advisor, a little known economist named Milton Friedman, told him he couldn’t give him a PhD for ideas that weren’t economics. He was joking of course, but discovering the benefits of diversification and mean variance optimization was about as important a discovery in finance as there’s ever been.
Markowitz had a profound impact on the way I think about the world. While I never had the benefit of meeting him we emailed at times and he helped set a younger and arrogant Cullen on a very different path than the one I was on. I would naively criticize his use of standard deviation as “risk” and the seemingly simplistic manner in which Modern Portfolio Theory arrived at “optimized” portfolios. He would patiently emphasize the idea that all models are flawed, but some are useful. And boy was his model useful.
You could argue that much of his work resulted in learning to be open-minded. That is, after all, what diversification essentially is. It’s learning to avoid the risks of binary thinking and reducing the potential for negative outcomes by understanding that the world is not black and white, but mostly a great big gray distribution set. He himself would admit that he didn’t trust the “optimized” portfolio selection process of MPT and often deviated from it for various personal and emotional reasons. But it always formed the foundation from which he developed his open-minded and diversified approach to portfolio selection.
Perhaps more importantly, Markowitz was obsessed with automation and creating systems to allocate assets. He was more computer programmer than financial theorist. His rigorous use of data and statistical analysis helped formalize many of the automated processes we all benefit from today.
Above all else he was a lifelong educator. He will be greatly missed, but his contributions and impact will live on.