by Roger C. Gibson
by Harry Markowitz
I decided to review these books together because the subject
matter is quite similar, yet the approaches of the two authors couldn't be more
different. Harry Markowitz is a Nobel Prize winner who more or less defined the
concept of risk in investments and how to weigh it in the construction of a
portfolio. Roger Gibson, on the other
hand, is a financial adviser with many years of experience and a unique view on
balancing a portfolio to limit risk and maximize profit. Both advocate asset
class and securities mixes that lead to portfolio diversification and limit
risk. Markowitz does it with lengthy examples and complex formulas. Gibson does
it with hypothetical portfolios and performance evaluation of investment
classes.
Markowitz’s book, which is the first of four volumes on this
ostensibly deep subject, is much like a college textbook. The financial jargon
is at times a slog, and the formulas are nearly incomprehensible without an
advanced mathematics degree. The parts that can be understood by the typical
layman (like me), however, are interesting and useful. They make it very
possible to analyze one’s own portfolio in the light of Markowitz’s experience
and research, and that should lead to risk minimizing, return maximizing
portfolio.
Gibson’s book does not suffer from the academic bent that
afflicts Markowitz’s book, but it does have the drawback of being partially
directed toward financial planners and investment advisers. He shows historical trends and their effect
on hypothetical portfolios, and then strengthens his argument with critical
analysis of the performance of various asset classes during up, down, and
sideways markets. The heart of his strategy ends up being diversification,
rebalancing, and risk avoidance which individual investors and investment advisers
can put to work in their personal and client portfolios. He then spends the
last third of the book explaining how an investment adviser can analyze a
client’s risk tolerance and use the principals contained in the book to build a
suitable portfolio. Some people will find this interesting and useful, but as a
long time investor who is not a CFA or investment adviser, I found it to be not
that useful.
Risk-return analysis and risk avoidance are important
cornerstones of any investment strategy, which is what makes these books so
important. Without the benefit of the other three volumes of Markowitz’s work,
and not needing the investment adviser sections of Gibson’s work, it’s hard to
give them full marks for their books, but the material that is pertinent and
understandable is so valuable, that a four-and-a-half dollar mark for each is
more than justifiable.
