Brain Candy: Robert Arnott interviews Harry Markowitz

Disclosure: My employer is a partner of Research Affiliates, and I am a staunch believer in the Fundamental Index® methodology.

Research Affiliates has posted some great videos for those who are interested in the academia of investing. It’s certainly not for everyone, but when either of these guys speak, I listen intently. The brain power in that room is off the chart. Harry Markowitz is a legend, a Nobel Laureate in fact. And Robert Arnott is no slouch either, having received five Graham and Dodd Scrolls to mention but the tip of the iceberg of his accomplishments.

In this series of five videos, they muse about the following topics:

  1. Did diversification fail?
  2. The Capital Asset Pricing Model (CAPM)
  3. The Efficient Market Hypothesis
  4. Harry’s Heroes
  5. The Fundamental Index Approach

I’ll stress that the videos don’t explain these topics on a beginner level, but rather they focus on some food for thought pertaining to these subjects. A fairly good grasp of these concepts is required to really benefit from watching the material.


Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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  • Michael James

    Great videos! (For me anyway.) My summary:

    – Speaking of the 2008/2009 crash, headless chickens say it’s different this time, but it isn’t different this time.
    – You can’t borrow at the risk-free rate. (This is my basic criticism of many investing strategies.)
    – The markets may be irrational, but they’re hard to beat.
    – Fundamental index weighting gives a little extra boost.

    The big question on the last point is whether this extra boost is more than the added costs over cap-weighting. I don’t have an opinion on this point yet.

    • Patrick

      @Michael: Naturally I have an opinion, despite not yet having viewed the videos. To the extent that fundamental weighting beats cap weighting, that must be temporary. If it works, everyone will do it, and the cap-weighted indexes will converge toward the most successful fundamental indexes.

      The only way fundamental indexing can win long term is if those designing the index can continually find new ways to locate pricing errors in the market. That’s not impossible, but it would require extraordinary talent, and I have no confidence in my ability to locate fund managers with such talent.

      Therefore I tend to give little thought to fundamental indexing. (Sorry Preet!)

      • Preet

        @Patrick – I believe your understanding of the fundamental index is flawed. The methodology does not locate pricing errors, it merely randomizes exposure to over pricing errors and under pricing errors, whereas a cap-weighted index magnifies weightings in over priced stocks and decreases weightings in under priced stocks.

        So long as pricing errors exist (note I’m not saying they must be identified), and so long as active managers eventually identify mispricings and tend to drive prices towards fair value on a continual basis (i.e. the market just need to be efficient “enough”), a fundamental index will out perform a cap-weight over longer periods of time (I believe the win rate over three year periods is roughly 80% and it seems it asymptotically approaches 100% over longer time periods).

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