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TTU116: In Pursuit of the Perfect Portfolio ft. Steve Foerster
1st December 2021 • Top Traders Unplugged • Niels Kaastrup-Larsen
00:00:00 01:06:57

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'When you look into history, so-called derivative investment products that you think of as being recent, actually go back to 2400 BCE, in various forms. Call options go back to 600 BCE at least. In the 18th century BCE there were personal loans, as well as a liquid secondary market for these promissory notes. So what we think of as new inventions are actually very old.' - Steve Foerster

If we could gather all of the famous investing pioneers from world history into one room and ask them to build the perfect portfolio, what would it look like?  Well Steve Foerster and his co-author (and previous guest on the show) Andrew Lo, set out to do just that, with their new book called 'In Pursuit of the Perfect Portfolio'. I thought I'd invite Steve onto the show to discuss his new book, go through some of the 'golden threads' of investing that he came across, his journey in the world of finance, and of course, get his opinion on how close Trend Following is to 'the Perfect Portfolio'.

Thank you for listening and please welcome to the show, our guest, Steve Foerster.

In This Episode, You’ll Learn:

  • Steve's journey to becoming a Professor of Finance and how he ended up co-authoring a book with Professor Andrew Lo
  • Some of the concepts from the legendary financial experts they interviewed for the book
  • How closely linked the academic world of finance really is
  • About some of the most important findings in investment research over the decades
  • About the "untold" story of an early 20th-century mathematician, Louis Bachelier
  • Harry Markowitz' story
  • What Eugene Fama's Perfect Portfolio looks like
  • About William Sharpe and his now famous 'Sharpe Ratio'
‘The missing link was that correlations are critical as well. In fact, as we know, the more securities that you put into a portfolio, it's those correlations or that co-variant component that really dominates.' - Steve Foerster
  • How the phrase 'beta' came about
  • How computers enabled researchers to access deeper insights into the world of investing
  • About the debate between active and passive investing
  • Whether volatility should still be considered as a measure of risk
  • About the progression of volatility data into today's investment models
  • About the story of Eugene Fama
  • How Steve views the question of 'what is the perfect portfolio?'
  • Whether Steve considers Trend Following investing as, essentially, a perfect portfolio

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IT’s TRUE 👀 – most CIO’s read 50+ books each year – get your FREE copy of the Ultimate Guide to the Best Investment Books ever written here.

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'The insight that Sharpe picked up on was, 'what happens to a model if we add one more security, and this security was a risk-less security? It turns out that this was the tangent that led to the optimal portfolio.’ - Steve Foerster