In Pursuit of the Perfect Portfolio
Profile of ten of the largest names in portfolio theory. Has some sections relevant for an audience interested in RP and worth picking up for those chapters alone (see below); also great for people brand new to the big names in finance. Overly biographical at times, though, and sometimes loses the thread of actually getting towards its main point of explaining different approaches to portfolio construction.
Read the original:
Andrew W. Lo
Important Points for the RP Investor:
If you are not familiar with many of the ten people profiled in the book, then I'd definitely recommend reading it cover to cover, as that will give you a sense of the evolution of the issue. If you are familiar with them, though, I’d probably approach this as a collection of chapters and just skip around, as there really isn't much new here.
Chapters I’d focus on are:
One - Introduction: A Brief History of Investments. Look at the state of thinking about portfolios prior to 1952 - long story short, people didn’t really think much about them, other than they identified diversification as a goal (but hadn’t really articulated what that meant and how to achieve it).
Two - Harry Markowitz and Portfolio Selection. That all changed in 1952 with the publication of Markowitz’s seminal paper “Portfolio Selection.” This chapter is great to read for how it places the Markowitz paper in context and highlights its major points. Indeed, it may be more productive and efficient to read this chapter about Markowitz rather than reading the paper itself (if you want a summary of the Markowitz paper, here you go).
Three - William Sharpe and the Capital Asset Pricing Model. Great to read as well, since you get the sense of the development of traditional portfolio theory (a.k.a. Mean-Variance Optimization). Like the Markowitz chapter, you’ll get a better sense of Sharpe and his work from reading this as opposed to the original
Five - Jack Bogle and the Vanguard Portfolio: I’m a huge fan of Jack Bogle, so it was a pleasant read, but if you’ve already read any of Bogle’s work or are familiar with his general philosophy, you won’t pick up too much new or groundbreaking in this chapter. Low-fee, broad-based index funds are the cornerstone of investing: check.
Ten - Charley Ellis and Winning at the Losing Game: Again, I probably enjoyed this chapter just because I like Ellis, whose book was one of the ten best I have ever read about personal investing, and whose central metaphor (investing is like a tennis match; amateurs should focus on just not committing unforced errors - use index funds that keep costs low) I use all the time.
Twelve - So, What is the Perfect Portfolio? Concluding chapter synthesizes body chapters, with a focus on commonalities.
Pages 308-319: Recaps the ten chapters.
Pages 319-end: “Putting It All Together.” This is the synthesis. Lo and Foerster identify principles which the theorists, though diverse in many ways, agree on, then follow it with a kind of investing version of the Myers-Briggs personality rubric (I’m a DMSR, by the way). As you probably could have guessed, there is no perfect portfolio, but rather, it's all about finding the perfect portfolio for you.
Chapters four, six through nine, and then eleven are all skippable, i.m.o. In case you’re curious, they are about: Eugene Fama, Myron Scholes, Robert Merton, Marty Liebowitz, Robert Shiller, and Jeremy Siegel.
Other Resources Related to this Paper:
To accompany the publication of the book, Lo and Foerster produced a series of video interviews with the principals from the book and assembled them in a playlist. Here is the interview with Bogle, though the YouTube algorithm should serve up the others in the suggestion column: