John Cochrane: Modern Modern Portfolio Theory (EP.169)

Today's conversation is an extremely enlightened and highly detailed one, that you may want to return to, in order to accrue all of its value. We host John Cochrane, an economist specializing in financial economics and macroeconomics. John has a popular blog and podcast called The Grumpy Economist and also hosts the GoodFellows Podcast. He is a Rose-Marie and Jack Anderson Senior Fellow at the Hoover Institution and a senior fellow at Stanford Institute for Economic Policy Research, and was a Professor at the Booth School of Business at the University of Chicago. In this fascinating chat, John shares so much of his expertise, going in-depth on the subjects that we and our audience are constantly exploring and excited about. We discuss long-horizon stocks, market inefficiency and return predictability, classic portfolio theory, risk-less assets, and performance evaluation. John also shares his perspectives on the future of centralized finances, digital and cryptocurrencies, and where the business of financial advice is headed. So for all this and more from a leader in his field, be sure to join us for this great episode of the Rational Reminder.

Key Points From This Episode:

• Breaking down the basics of why stock prices go up and looking at the market as a whole. [0:02:05.8]
• The information contained in valuation ratios about long-horizon stock returns. [0:04:25.3]
• Market inefficiency and return predictability; unpacking the opinions on the correlation. [0:07:17.8]
• What the research on available information and market timing tells us about predictability. [0:12:59.6]
• Under-appreciating risk and asking important questions about dividend growth in the future. [0:18:46.5]
• The huge impact that predictability can have on classic portfolio theory. [0:22:36.2]
• Volatility aversion and communicating important concepts across divides. [0:28:11.7]
• John explains the risk-less asset for the long-term investor. [0:30:12.6]
• Using the example of bonds to get to grips with performance evaluation. [0:36:26.8]
• Unpacking the roots of wealth inequality and the best perspectives for understanding it. [0:40:30.4]
• Misguided thoughts about the market and the usefulness of keeping general equilibrium in mind. [0:44:14.1]
• Market portfolios and the zero-sum game; hedging state variable risk. [0:52:40.5]
• Decisions about the ability to bear the value risk premium and allocation. [0:58:10.7]
• John's thoughts on the future of financial advice. [1:01:27.8]
• Describing the fiscal theory of the price level and its predictions about inflation. [1:06:03.6]
• Cryptocurrencies and value maintenance; John's perspective. [1:13:12.8]
• Assessing the longevity of traditional or centralized finance. [1:19:15.4]
• John's own definition of success in the different areas of his life. [01:22:06.1]