Harry Markowitz, Nobel Laureate and founder of Modern Portfolio Theory, passed away in June this year. Much has been written about his contribution to the development of modern finance theory. Less, though, on Harry as a person.
I am fortunate to have known him for almost three decades, having set up a joint venture with him in the 1990s to launch a series of quantitative equity funds in the UK managed by his research group at Daiwa Securities based in New Jersey. While the funds showed outperformance, we were too early to be able to persuade pension funds to invest in a quant fund. How things have changed!
I recall with great affection the last time I met him in San Diego in June 2019, for lunch after spending sessions on the Monday and Tuesday of that week introducing him to Yves Choueifaty, president and CIO of TOBAM.
With a day to kill before my flight back to the UK, Harry suggested lunch at his favourite local restaurant close to his office near San Diego pier. I knew Harry was no fine-dining fan but the International House of Pancakes that he chose was somewhat of a surprise choice, at least to a non-American.
“Harry, despite winning the Nobel Prize for economics, never saw himself as an economist and not even as a mathematician, but rather, as a philosopher ”
I arrived at the venue a few minutes early and sat down, pondering whether I had arrived at the right location, and how Harry would travel to the place at the age of 92. After a few minutes, he duly appeared at the revolving door, struggling to get through with his Zimmer frame. He had driven to the restaurant himself, which impressed me immensely, given he was blind in one eye.
After ordering – his favourite sausages added to a pancake combo – Harry explained that he was still earning more than he spent. With little or no yield from bonds, he had diversified his portolio by investing in property and kept a house for visitors. With 20 children and grandchildren, he was not short of guests but he generously invited me to come over again with my wife to see him and stay at the guesthouse. His latest acquisition, he told me proudly, was a condominium by the boardwalk on San Diego beach, near the pier, which he said we should visit after lunch.
Reflections on Bill Sharpe
Over our pancakes we entered into a deeply intellectual discussion on portfolio theory and the meaning of beta. Bill Sharpe, he explained excitedly, had created two different definitions of beta, one in 1963 and a different one in 1964 and “the two had nothing to do with each other and were almost orthogonal”, creating, Harry explained, much confusion.
The 1963 definition is determined by the product of the correlation of a stock or portfolio with the market portfolio multiplied by the ratio of their standard deviations. The 1964 version is based on the idea that if everyone is able to invest in, or borrow at, the risk-free rate, then the efficient frontier would consist of a straight line going to infinity. This gave rise to the ideas behind the capital asset pricing model (CAPM).
While I struggled to take in the differences in between mouthfuls of pancake, Bill, declared Harry, was surely no longer producing any original work. Given that he is in his 80s that perhaps is understandable, although Harry laid the blame on his wife.
We then set out on our way to his condominium with Harry shuffling slowly down the street on his Zimmer frame. When it came to crossing the major highway between us and the beach, he seemed unperturbed that the lights had turned to green as we were still in the middle of the road. “Don’t worry,” he said, with a twinkle in his eye, sensing my deep discomfort, “the cars always wait for me.” I prayed that he was right as we walked slowly across the road with what seemed, to me at least, a lengthening queue of irate drivers glaring at us.
As we headed towards the broadwalk, Harry would stop every now and then and check his pulse, which caused me even more discomfort.
We then set out to walk to the end of the pier, which Harry did on a regular basis for exercise, although he was finding it harder to do each time. When we finally reached the end, he rested on the seat of his Zimmer frame while I persuaded some passers by to take some photos of the two of us.
The new condominium was pretty much adjacent to the pier and we headed there. He found his keys and showed me inside. The furniture had not all been delivered and the interior was still strewn with packages. What he most enjoyed was the delightful balcony outside, where we sat as we watched the stream of passers-by on the boardwalk, walking, running, skateboarding and roller-skating in their beachwear.
With Harry still checking his pulse, I was getting concerned that he might have overexerted himself and in the company of a person with no useful first aid skills.
A philosopher, not an economist
Heading back to the restaurant car park, Harry was in a jolly mood, and probably walked faster back from the beach than he did getting there. I was certainly all set to arrange another trip in 2020, which would have marked the 30th anniversary of his Nobel Prize awarded in 1990. But 2020 saw the COVID lockdown, and Harry proved to be unobtainable during that time as his long-term secretary, herself in her 70s, did not answer calls or emails and I suspect they were probably both confined to their homes.
Harry, despite winning the Nobel Prize for economics, never saw himself as an economist and not even as a mathematician, but rather, as a philosopher who delved deeply into the subjects that he was passionate about.
When I met him in 2019, Harry told me he was working on his latest book and intended to continue writing till he was 105. Sadly, he did not quite achieve that goal, but his ability to continue thinking deeply and writing about the subjects he was passionate about well into his 90s, is an inspiration to all of us.
Joseph Mariathasan is a contributing editor to IPE and a director of GIST Advisory