With Stephen C. Sexauer
“I know some things,” he said. “I can, you know, do math and stuff.” – Harry Potter, in Harry Potter and the Philosopher’s Stone, by J. K. Rowling. Most investors believe we “know some things” — and that we can do some “math and stuff.” But the question is: Do we know what we need to know? Do we know all the pieces?
The late Harry Markowitz could certainly do math and stuff — he majored in mathematics as an undergraduate at the University of Chicago. He always considered himself first and foremost a philosopher, and that’s how he lived his academic life.
He gave us a portfolio philosophy: a systematic way to define and measure investment risk, and then the insight that risk should be balanced against our desire for returns. He also gave us the mathematical method to optimally combine securities to form a portfolio, one that achieves the balance just described.
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