I recently read In Pursuit of the Perfect Portfolio by Andrew Lo and Stephen Foerster. The book starts by referencing the Japanese classic film Rashomon, which explores a murder as described from the perspective of different characters.
The pursuit of the perfect portfolio took the authors down a fascinating path interviewing 10 of the most influential figures who transformed the field of finance. These figures developed new investment theories, frameworks, and models for a balanced and well-hedged portfolio.
One ‘perfect’ portfolio, 10 different perspectives, with each figure approaching the problem differently, guided by distinct philosophies and outlooks on fundamental issues such as risk tolerance, income, savings, goals, lifestyles, and intended outcomes.
The Philosophical Overtone
Permeating the book is a clear philosophical overtone. For starters, the main question it proposes to explore is philosophical in nature: What does the ideal portfolio look like?
The answers they present and examine include a combination of technical tools for reasonable asset allocation, diversification, and an overall portfolio construction that’s hedged against fat tails, interest rate fluctuations, market cycles, long vs short-term investments, and passive vs active strategies.
On the other hand, though, the answers also included a more philosophical dimension that the authors themselves did not always elaborate further upon. Some questions revolved around knowledge and forecasting (what does the perfect portfolio look like, how can we hedge against uncertainty, what will the market look like next year, does historical data help us predict future market behavior? etc.)
Know Thyself
But then there’s another, more personal aspect to the questions proposed. Those are even more difficult to tackle. The most fundamental dimension of the pursuit of the perfect portfolio, in their own words, and which summed up the conclusion of their book, requires that the investor ‘know thyself,’ the ancient Delphic maxim famously adopted by Socrates.
The questions an investor ought to ask themselves are meant to have them reflect on some of the more abstract concepts that aren’t easy to articulate, including time and risk aversion. To truly know oneself, and to reflect on such abstract concepts, requires both internal and external dialogue.
Such was the philosophical approach of the book itself, combining theory, experience, examples, interviews, and an ongoing dialogue with readers. It urges them to look within themselves and to widen their perspective by examining a mix of expert approaches.
All the while, it highlights that at the end of the day, the perfect portfolio depends largely on the investor’s circumstances, experiences, and the extent to which they know themselves. This includes their risk tolerance, what their lifestyle should look like, how they want to retire, etc.
As the authors themselves put it:
“As we mentioned earlier, the Perfect Portfolio is a moving target, one that depends intimately on who we are and where we are in our careers and stages of life and how favorable or hostile current market conditions are to our short-term and long-term goals.”
Underlying all of this are a set of compelling philosophical questions that require reflection and dialogue in pursuit of a portfolio as dynamic as our lives, continuously evolving as our interests, careers, economic situations, and personal circumstances change.
As the authors conclude:
“And that, after all, is the most important key to survival: adaptation. In the end, our approach to the Perfect Portfolio leads us to an important conclusion, the ancient Greek philosophers’ maxim ‘Know thyself.’ Easier said than done, but at least we have principles, a process, and a path to guide us on where to start in designing our own Perfect Portfolio.”
Get your copy of Philosophy for Business Leaders