Harry Markowitz is often referred to as the father of Modern Portfolio Theory–a collection of mathematical models that quantify the behavior of assets and portfolios of assets. Harry’s work specifically addresses the latter and examines how assets may be combined to reduce volatility and (potentially) increase returns. I briefly alluded to Harry’s work in an earlier article on portfolio construction, but wanted to cover the major points in greater detail.
Claude Shannon was a prolific individual when it came to mathematics and science. The former Bell Labs researcher and MIT professor helped develop a field of study known as information theory and played a major role in inventing the way that computers compute. He also had an interest in the stock market, and would hold occasional meetings at MIT on the topic of scientific investing. One such method he proposed required no knowledge of future market behavior–a strategy that was designed to profit from a completely random walk.
I’m a big fan of simple things. The rule of 72, a quick calculation that computes how long it will take to double an investment, is probably as simple as they come. The formulation is fairly straightforward. The time required to double your money is equal to 72 divided by the rate of return
Years To Double Money = 72 / i
Where i is the expected rate of return. Obviously, lower rates mean more time is needed, and the relationship isn’t linear