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Tulipmania Revisited: Separating Hysteria from History
I was in Holland last week, and the Dutch tulips are in full and magnificent bloom. The fields full of technicolor flowers, in a display so extensive and impressive that it seems impossible, might not have made the list of Seven Wonders of the World, solely because they did not exist in ancient times. Nor,…
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From Tangency to Barbell Strategy: What Smart Investors Actually Do
What if one of the most elegant ideas in investment theory turns out to be nearly impossible to apply in the real world? In previous posts, we developed a number of ideas from Modern Portfolio Theory leading to the idea of the Tangency Portfolio. As a reminder, the Tangency Portfolio is the portfolio which lies…
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The Capital Market Line—Is it the Holy Grail?
In a previous post, we introduced the concept of the efficient frontier. The efficient frontier concept is frequently presented in a graph, such as the following. Capital Market Line Now comes the insight of a single “efficient risky portfolio.” The assumption is that an investor can choose to allocate his or her portfolio between the…
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Does Mean-Variance Optimization Help with Risk Management?
How many times have you heard, or said, “past performance is no guarantee of future performance” or something similar? SEC rule 482 explicitly contains the language “past performance does not guarantee future results,” and the SEC requires this language in rule 482 advertisements. While past performance may not predict future performance, we learn a great…
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Do You Know How You’re Influenced by Modern Portfolio Theory?
Almost everyone believes that you should diversify your assets – but there are different explanations about why. It is sometimes said (though how anyone would know is another story) that fish are not aware that they swim in water. Similarly, many investors today live in a world shaped by many of the assumptions underlying Modern…
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A Better Way to Index?
In the last post, we saw how market cap weighting systematically over-weights “expensive” stocks and underweights “cheap” stocks. Non-market cap weighting is a potential solution. Non-Market Capitalization Weighting Let’s look at a few studies regarding the effects of different indexing methods. The availability of historical returns databases, and modern computing power, have made it feasible…
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Are Capitalization-Weighted Indexes (Like the S&P 500) Inferior?
Most financial advisors agree that it’s difficult to beat “the market”. It’s easy to define “beat the market” as generating an investment return (typically before tax, and typically ignoring transactions costs) that is greater than the market return. But what, exactly, is “the market”? Which Stocks in the Index? In developing a stock market index,…
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Buffett Just Sold His Index Fund Position—Index Investing: Yes or No?
If someone came to you today and asked, “What’s the case for index investing?” what would you say to that person? In light of Warren Buffett’s recent sale of his Vanguard Index Fund position, advisors and clients may be more interested than usual in the case for index investing. There’s a good case for index…
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The Rise of Index Investing—And Why You Should Care
The indexing approach to investing accounts for over half of US equity investments in 2025. Compare that to the 1970s, when it was almost non-existent. Among many investors and their advisors, indexing has become conventional wisdom. There are good reasons for indexing’s growth. The case for indexing is strong, and we will review that case. But there’s also…
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A Surprising Case for Crypto
I’m going to tell you of a surprising, hard-to-refute case for “investing” in crypto. But first, let’s look at some background. If you’re old enough, you may remember the stories that used to be told about the 1920s stock market, shortly before the great crash of 1929. One of the most famous such stories is that…