Zvi Bodie on Stocks and Annuities in Retirement
August 10, 2010
by Dan Richards
There is an upcoming revised edition of the book which you co-authored, Bodie, Kane and Marcus on Investments, the number one text for investments in universities around the world. What led to you and your co-authors to write the first version of that text back in 1987?
It's been a long time. We were teaching a course in investments in the MBA program at Boston University. The textbook that we used at that time was by Bill Sharpe (a Nobel Prize winner) which we thought was a wonderful book, and had been a big change from the textbooks that came before him. He was really the first author to take an economic approach to the subject. Although we loved the book, students didn't like it.
Was it too complex or difficult?
Yes. We found ourselves writing up all sorts of supplementary materials, and then re-ordering and reorganizing our teaching plan. The Sharpe book and other books that were out at that time talked about managing a portfolio of risky assets, where all the assets were risky. Once they talked about that – that’s called a Markowitz model – then they would add a safe asset and derive what's called the efficient line, capital market line, or capital allocation line.
We said that's not the most understandable way to do this. It's actually much simpler, for a host of reasons, to introduce students first to the idea of combining a safe asset with a risky asset. Indeed, that is the way it's done in a lot of the economics literature, one safe asset, one risky asset, and then later talking about how you get the composition of that single risky asset. We had a hard time in the writing stage of the book convincing other professors that our way was better, but we basically won most people over, and that's the way it's done now.
The last edition, the eighth edition, was released two years ago, which is not a long period of time. What's changed in the last two years that caused you to update the book?
The big change that we are going to see throughout the investment industry and the advisory industry – and it's already occurred in many ways – is a shift of emphasis from performance to risk. Think of the two elements of investing as being reward and risk, and trading them off. Over the last 30 years, under the influence of the long bull market in equities, the emphasis really was on performance. You talked about risk a little, but it wasn't really the main thing.
There was a conventional wisdom that developed which is totally false, that as long as you have a long time horizon, the risk goes away. You don't have to worry about it that much if you are a long-run investor. That was never right. Now I think there's a heightened awareness that it isn't right, and an openness on the part of investment advisers and lots of people that I speak to, who in the past wouldn't give me the time of day because I was constantly emphasizing the fact that you have got to worry about risk. Now they are interested in hearing what I have to say.