In Pursuit of the Perfect Portfolio: Myron S. Scholes
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- Опубликовано: 27 июл 2024
- Please do not quote. To accompany the forthcoming book, In Pursuit of the Perfect Portfolio by Steve Foerster (Ivey Business School at Western University) and Andrew W. Lo (MIT).
Video Production by: BigTime Video Services (www.bigtimevid.com/)
Undoubtedly one of the best finance interviews of all time. Those who cannot recognize the value of Scholes' insights have never truly understood the nature of markets and/or portfolio management. His findings are mathematically sound, though his proposed application of the knowledge is not. The option market does not reflect future knowledge, but merely today's perception of the future in the form of a best estimate. In mostly efficient markets, building a strategy upon known information is a fool's game as it is already priced into markets. Instead, investors should diversify across any sources of uncorrelated systematic risk and thereby reduce their expected volatility drag/convexity costs.
In this interview, Scholes tells us that a 60/40 allocation and target funds are not the way to go, but he never discusses what he recommends for the individual investor to do.
He can only discuss risk management concepts that only huge institutions can do, but are apparently not doing.
I believe you're correct in your understanding--his statements are academic, are scattered all over the "playing field" and relatively unusable. Perhaps on the day we each come to manage our own multi-billion dollar pension funds which are designed to operate into perpetuity... (blahh, blahh, blahh...).
Robert Root yes, most MIT “perfect portfolio” videos are helpful, but not this one!
I believe in his view there should not be individual investors making their own decisions for retirement. He is a messenger of active investing and the finance industry. You should give your money to the finance experts like him and they will take care of it, because they can strike the market. That is the narrative.
@UC6Eh-S_RDhvI-rZA_GrCZog try to reference the time in this video when he says pick a passive index. He says nothing in this video about any suggestions regarding a passive index.
he says you should target constant volatility which could mean buying and selling options to manage risk or employ other strategies
He's so well spoken and intelligent.
No
His hedge fund lost $4.6 billion in it's 2 year existence. LOL. Such "intelligence"
Scholes says what happens in the next 3 months is most important. Bogle and buffet say focus on the long horizons. How do we reconcile this?
Because of that people like Scholes say, you need a financial adviser. In the long term you do not need it and you can invest the saved money in ETFs and not financial advisers.
Mr Buffet made a fortune in long term investment. The great Jim Simons made his fortune in trading. Same goal can be achieved in multiple ways.
If you don't know it's best to follow the market, if you know (either by luck or with the right available tools or with a new groundbreaking idea) you can perform better. He says that if the world could refocus on his ideal of perfect portfolio and what its recipes are, people could achieve more. But this is not the case nowadays.
Scholes lost billions, buffet made billions. LOL.
You obviously did not get his point. His reference was meant in the sense that any short term behavior of a portfolio will necessarily translate into a corresponding long term behavior by compounding over time. There is nothing to reconcile about these two statements.
Such an obvious and brilliant critique of target date funds. The problem is that you have to be someone of Myron Scholes's stature to be taken seriously when your critique target date funds in this manner.
One has to distinguish between theory and practice here to my mind. Just because the current implementation of target date funds is not sound does not mean the whole idea is useless.
Yes, fair enough. You make a reasonable point. Overall, though, I think that target date funds should seek to lower risk as time passes and too many of them are hard-wired to the idea that the Bloomberg Barclays Aggregate Bond Index is "low risk" and equities (potentially including real estate equity and, dare I say, Bitcoin) are high risk even though we live in a world that is predisposed to solve every problem through quantitative easing. To draw upon the ideas of Jim Grant, we now live in an inherently inflationary world where "something for nothing," debt forgiveness, government stimulus, and consumption without production are viewed as God-given rights by the young people. It started with Greenspan bailing out LTCM and has snowballed over the decades. It strikes me as very flawed that target date funds axiomatically push money into bonds as time passes. Perhaps more adoption of insurance company-backed stable value funds is the answer. --> stablevalue.org Thanks for commenting. @@glorydays1565
@@WhiteCloud746 ultimately, you want to have a stable exposure to sources of systematic risk and their associated risk premia over time (measured as an excess return over the risk-free rate). In the world of non-equilibrium markets, as described by Scholes in the video, the future time-varying distribution of systematic risk across its various sources is unknown. Investors should diversify across any sources of uncorrelated systematic risk to keep their expected exposure to systematic risk more stable over time and thus reduce their expected volatility costs.
Relying on the market for information is crazy.
Efficient financial markets are pricing in any currently available information. The "problem" is rather that there is no way of exploiting information that has already been priced in.
No questions about the collapse of Long Term Capital Management?!
20 feet river
All he did was reaffirm my understanding of (and belief in) Bogle's broader recommendations, and Buffet's recommendation to individual investors. Reading through his bio on Wikipedia, almost everything he has been involved in beyond academia are short-term focused trading operations, that exhibit long tails of increasingly lowering successes (e.g., Janus). He really believes in himself, LoL.
Robert Root Bogle has said a 60/40 is a reasonable portfolio and one that he personally uses via his investments in Wellington.
In this interview, as Scholes says that a 60/40 allocation and target date funds are NOT the way to go, but he never suggests any specific portfolio allocations or alternatives.
Normally, the MIT perfect portfolio series provides helpful suggestions, but this one does not provide any useful guidance even though the interviewer asked him repeatedly.
@@everetteborr The same with the Robert C. Merton interview.
What do you expect? In the Robert C. Merton Interview the collapse is also not mentioned.
Most interesting interview, I'm only at 8min
Why is risk not constant in an index fund? The risk of each company does shift, but on an aggregate scale I doubt it changes very much. Would be interesting to see some data on this though
it changes, there is something called volatility clustering
If the market has just crashed 30% like in march last year the risk in MASSIVELY lower than for example right before that crash or even right at this moment.
The S&p 500 does average a 9% return but that average doesn't include the negative returns the S&P will have in bad years, like 2009, it was a negative reurn for the index so the model of just regressing returns against the S&P leaves out the risk of severe losses. The benchmark(S&P) is thus a risky asset so using that as the benchmark is only a starting point in building a portfolio
Are you talking about realized risk or expected risk? (as there is a huge difference between the two). When it comes to risk expectations, markets can be modeled as non-equilibrium systems, rendering the distribution function explicitly time-dependent. This is Scholes' point in the interview about time-dependent risk/return expectations. From a purely rational point of view, the expected risk/return _ratio_ should be assumed constant over time, i.e. the same return for one unit of systematic risk would be expected for different time periods (allowing for time-dependent expected risk and return). This is refuting the false assertion that expected risk would necessarily decline after a drawdown. Due to the increased uncertainty in such situations either the opposite is true and both expected risk and return should be increasing, both should be decreasing, or there is no change at all. That said, market participants do not need to be rational all the time but we cannot systemically predict occurrences of irrationality.
Buy low and sell high…
Where is my Nobel Prize in Economics?
How many billions has your hedge fund lost?
Hi
Yall are prodigies if you can understand half this stuff
@@prestonchaussee790 i takes to lear about theory of finance... which started during the early 1950ies i guess...
Hablando del portfolio perfecto cuando casi arruinas la economía mundial con tus experimentos, descarado. Deberías estar en la cárcel.