Is MPT MIA or KIA?
For an endeavor as nuanced as investing, the basic idea about how to manage stock portfolios is surprisingly rigid—and slow to change. Modern Portfolio Theory (MPT), as the theory is called on Wall Street, was developed in the 1950s, when Dwight D. Eisenhower was president, Apple’s Steve Jobs was just a toddler, blacks and whites were widely separated, man had not yet walked on the moon, derivatives barely existed, and the New York Stock Exchange loomed large because the NASDAQ stock market would not be created until 1971.
The issues now defining the market barely existed in the 1950s, when Harry Markowitz began his life’s work. Back then, World War II was still a recent memory. The United States was emerging as the world’s only superpower. The Internet did not exist. People wrote letters, not e-mails. The majority of stock trading occurred on the floor of the New York Stock Exchange. To even gain admittance to one of the regional exchanges required character references. At the Philadelphia Stock Exchange, three people were needed to vouch for a prospective member, including a minister. Electronic stock trading did not exist. There were no algorithms that traded stocks, bonds, and commodities in milliseconds. Many people did not even own stocks. In the 1950s, the European Union did not exist. Jean Monet, the architect of the European Union, was barely laying the foundation to unify Europe’s economies—the European Union was not formed until November 1, 1993.