More Evidence on the Evidence: An Historical Overview of Capital Market Theory
August 14, 2015 | By fischer |
Why do we at Fischer Investment Strategies refer to our approach as evidence-based investing? As we introduced in our related paper, “Evidence on the Evidence,” we believe that the evidence – especially the kind that has been peer-reviewed and time-tested – is at the root of everything else we do to help investors achieve their personal goals through sound strategy. The alternative – trying one’s luck at stock-picking and market-timing – is a much tougher (and likely more costly) pursuit.
This begs the question: Which specific evidence has borne the most fruit over time? An exhaustive account of every meaningful contribution would be a lengthy list indeed, but it helps to be familiar with the most important insights that, in aggregate, offer investors a clearer pathway through the market’s daily twists and turns.
For our purposes, most of the tenets underlying today’s evidence-based investment strategies originate in the 1950s with Modern Portfolio Theory, so we’ll begin there.
Modern Portfolio Theory (MPT)
Harry Markowitz, “Portfolio Selection,” The Journal of Finance, 1952
Modern Portfolio Theory (MPT) represents one of the greatest equalizing breakthroughs in financial economics, paving the way for a radically different approach to investing. Prior to MPT, it was generally assumed that the b