March 1, 2015

Rethinking Investment Beliefs for the 21st Century

“Piketty sees the 60-year WW1-1970s period as an anomaly….which is now well behind us…. Future annual returns on capital will likely fall below the 5% experience of the 18th and 19th Centuries….”


Rethinking MPT

When we entered the investment business 45 years ago, the big new thing was Modern Portfolio Theory, or MPT for short. It was elegant and radical at the same time: elegant because it embodied a simple, understandable set of investment beliefs….and radical because these beliefs were at odds with the conventional wisdom of the day.

Today, MPT is no longer new, and no longer seen by most as elegant or radical. Just as Thomas Piketty (of “Capital in the 21st Century” fame) saw the 60-year period from World War 1 to the 1970s as a socio-economic anomaly in the grander sweep of things, so is MPT increasingly seen as an interesting anomaly in an investment context. At its core lay the Efficient Markets Hypothesis (EMH). It posits that investors act rationally, have access to the same information sets, interpret that information the same way, and consequently, hold the same risky market portfolio. Investors expressed their different tolerances for risk-bearing through their different weightings of this risky market portfolio and a risk-free asset.

Today, we recognize that we cannot invoke MPT as a substitute for thinking about how investment markets really work, and for thinking about how the resulting investment beliefs should lead us to invest the financial wealth of other people. This Letter traces the evolution of our own investment beliefs over the course of the last four decades, and the investment policy conclusions they lead to today. 

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