Page 30 - Investment Advisor - October 2021

COVER STORY

of investing superstars John and its overall productivity. It’s
Bogle, Charley Ellis, Harry sort of a win-win because it would
Markowitz, Robert Shiller and have inflation protection and be
Jeremy Siegel, shedding light on built on growth opportunities —
both their investing similarities and the governments wouldn’t be
and differences. as leveraged.
His point is that we should be
IA: How diverse are the investing open from a public policy perspec-
philosophies of the experts tive and that governments should
you’ve profiled? look into these types of ideas.
Stephen Foerster: Not even these 10
luminaries agree on one philosophy. Behaviorist Shiller argues that
As one of them, Martin Leibowitz individuals should “get a good
[who co-wrote “Inside the Yield financial advisor — one that good
Book: The Classic that Created the people recommend” since do-it-
Science of Bond Analysis”], said, yourself investing isn’t the best
at certain periods, being passive approach for many. Did others in
might work a lot of the time — but your book advocate that too?
it might not necessarily work all It was a consistent theme among
the time. “Shiller is best known for many of our luminaries. Shiller is
uncovering irrational best known for uncovering irratio-
Harry Markowitz conceived nal behaviors that many investors
Modern Portfolio Theory and won behaviors that many have. So left to our own devices, we
a 1990 Nobel Prize for developing might trade excessively and end up
it. What does he think goes into investors have. So left to underperforming.
creating the “perfect portfolio”? Having a financial advisor should
Markowitz’s big breakthrough our own devices, we might give us a good reality check to keep
was showing mathematically why our emotions in [control] and try to
diversification matters. It’s all about trade excessively and end save us from ourselves in terms of
correlations — how stocks move up underperforming.” the biases we have.
relative to one another, which is
really important. John Bogle famously created the
So by having a diversified portfolio of risky assets, we can first stock index mutual fund and founded The Vanguard
get the proverbial free lunch, where we can either reduce the Group. Your book quotes him as saying, “Stop trying to find
amount of risk for a given level of expected return or have the needle; invest in the haystack.”
a higher expected return for a given level of risk through The haystacks would be all the equities that might be available
diversification. in the U.S. market, and the needle would be the ones that seem
to consistently outperform. His notion is that since you could
Markowitz’s perfect portfolio would be to invest in low-cost potentially end up underperforming, you’re better off buying
ETFs and individual bonds. He said that the perfect portfolio the haystack — all the securities that are available in that mar-
is about “rational decision-making for financial planning.” ket. Thus, his notion of index funds.
In contrast to Markowitz, Robert Shiller, a Nobel Prize-
winning economist and author of the bestselling “Irrational No other asset classes, such as real estate or other
Exuberance,” is a proponent of active investing. alternatives, are required in the portfolio, Bogle argued.
Shiller’s point is that we should always be looking for innova- This is a point where our luminaries have some differences of
tions that can help us optimize the portfolio in terms of risk opinion. Others would take a more broad-based approach and
and return. Aspects of his “trill” idea [a new security he pro- certainly have real estate as part of the overall portfolio
posed called trillionth] — buying shares in a country’s GDP — But Bogle said that stocks and bonds will get you very far
have been adopted by some countries. But it has a long way to without having to worry about other asset classes.
go to get traction. From a risk-and-return perspective, his philosophy was that
The idea is that if the government creates a product that by limiting yourself to stocks and bonds, you’ll go a long way
would be related to the performance of the overall economy, in terms of getting those benefits from the diversification that
it’s almost like you’re sharing in the equity of the country Markowitz talked about.

28 INVESTMENT ADVISOR OCTOBER 2021 | ThinkAdvisor.com