In a recent interview, Harry Markowitz, the father of Modern Portfolio Theory, declared his child was not dead. The 84 year old Nobel laureate, stated “Whether you like portfolio theory or not, whether you think there are black swans or not, either you credit me or blame me, but I am the father of modern portfolio theory.”
…..(sounds of crickets)…..
Hmmm…well, I am not sure what that proves. But, I do know one thing. The death of modern portfolio theory makes me nostoligic for the Monty Python-Dead Parrot skit. Markowitz maybe short a few nails, but his parrot is dead.
“'E's not pinin'! 'E's passed on! This parrot is no more! He has ceased to be! 'E's expired and gone to meet 'is maker! 'E's a stiff! Bereft of life, 'e rests in peace! If you hadn't nailed 'im to the perch 'e'd be pushing up the daisies! 'Is metabolic processes are now 'istory! 'E's off the twig! 'E's kicked the bucket, 'e's shuffled off 'is mortal coil, run down the curtain and joined the bleedin' choir invisibile!! THIS IS AN EX-PARROT!!
Should we be surprised! He is a Nobel laureate. It is a badge they hand out for extreme cognitive dissonance. Here are some examples:
Anytime you purchase an investment product, there is always a disclaimer. It states, “past performance is not indicative of future results.” That disclaimer should be enough to justify digging a small-Polly-sized-hole in your backyard. However, MPT instead decides to build a portfolio based on this very thing. It looks at the past performance, tries to measure past risk (not measurable), and adjust the mix of asset classes in an “efficient manner” (meaning highest return for lowest risk) by using past correlations. Just forget that past performance not indicative of your future results (soon to be horrible) thingy.
This is a blog post so I will not go too deep, but here are some criticisms that should cause the toilet to swallow the parrot:
· Asset returns are normally distributed. If this was the ture, we would not have 100 year crisis every 5 years.
· Markets are efficient. Are you kidding!?! Please explain how a stock drops a few percentage points at the end of the day without any new information. Also, why do we prosecute the non-crime of insider trading? They can alter the price without disclosing the information.
· All investors are rational. I have yet to meet one rational person. Either you are stupid and irrational or you know how the world works which causes insantity.
· Investors have an unlimited lending and borrowing ability at a risk free rate. Okay, the Fed is trying. Arguendo!
· All investors have access to the same information at all times. Maybe the congressmen (exempt from insider trading) has a little bit more information than I do.
But, someone will come back and say, but look at our fancy mathematics! Our models, our models!! They are logical proofs!!!
Well so what. If I stated, “poison always kills people, all oranges are poisonous, if a human eats an orange, he will die,” this is a logically sound stupid argument. It may work in the model, but it is not true
I’ll take the slug!
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