[Book Sip] Investment Masters Discuss the 'Perfect Portfolio'

Some sentences encapsulate the entire content of a book, while others instantly resonate with the reader’s heart, creating a connection with the book. Here, we excerpt and introduce such meaningful sentences from books. - Editor’s note

John Bogle, Charles Ellis, Eugene Fama, Martin Leibowitz, Harry Markowitz, Robert Merton, Myron Scholes, William Sharpe, Robert Shiller, Jeremy Siegel. Six of these ten individuals have received the Nobel Prize in Economics, and one created the mutual fund industry. This book explores these ten influential figures in finance and investigates questions through interviews with them. It delivers valuable insights through the perfect portfolios introduced by these financial masters.

Investment knows no borders. Although the ten pioneers introduced in this book all operated in the United States, their ideas and principles apply worldwide. Investors do not need to distinguish between domestic and foreign markets when seeking the perfect portfolio. In fact, all the pioneers featured in this book advocate including international investments in portfolios. Considering Harry Markowitz’s concept of diversification, since global assets do not move in perfect unison, diversifying worldwide will be rewarded. The “free lunch” of increased expected returns without increased risk arises when investment opportunities with less than perfect correlation are found. U.S. stocks and Korean stocks are one such example. - From the “Korean Edition Foreword”

Markowitz’s 1952 paper was the first to mathematically express the concept of diversification. He demonstrated that risk could be reduced (though not completely eliminated) without lowering the portfolio’s expected return, and he showed exactly how to do it.

While the risk of individual stocks is important, it is also crucial to understand how each stock affects the overall portfolio risk. This is measured by the covariance of the individual stock’s returns with those of other stocks in the portfolio. Today, diversification is naturally considered important, but thanks to Markowitz, we better understand how critical the correlations between stocks and assets are. Nowadays, pension funds and endowment fund portfolio managers use his efficient frontier analysis to determine the appropriate allocation across various asset classes. - From “Chapter 2: Harry Markowitz and ‘Portfolio Selection’”

William Sharpe presents four investment principles: diversification, low cost, investing suited to oneself, and considering the overall situation. He elaborates on these four principles: “The very first principle is diversification. The closer you get to the market portfolio, the higher the expected return relative to risk. Avoid unnecessary investment costs, especially management fees and transaction costs, and save on them. Regarding investing suited to oneself, you must consider your own circumstances, especially risks in your personal life beyond the financial markets. Lastly, investing with consideration of the overall situation is necessary. If you believe market prices are wrong and thus invest heavily in individual stocks or sectors, you must clearly understand why your view is correct and the market is wrong. Asset prices are not set by Martians.” - From “Chapter 3: William Sharpe and the Four Investment Principles”

Perfect Portfolio | Andrew Lo & Steven Foerster | Translated by Kim Minyoung | BookOn | 556 pages | 28,000 KRW

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