Facebook's Swings Are Ho-Hum to a Nobel Laureate WHAT are ordinary investors to make of the puzzling swings in Facebook's first-day share price on Friday? Or of the fact that this company, all of eight years old, is now worth more than $104 billion on the stock market? For some perspective, I turned to Harry M. Markowitz, who may have had a greater influence on current theories of finance and investing than any other living person. Mr. Markowitz, a 1990 Nobel laureate in economics, is the father of modern portfolio theory. His advice: Don't worry too much about Facebook's oscillating stock price. Or, for that matter, about gyrations in another big stock in the news, JPMorgan Chase, after the disclosure of a precarious multibillion-dollar hedging strategy. In a week like the one we've just had, perhaps Mr. Markowitz's most immediately relevant insight is that most people don't need to think much about individual stocks. "You can put yourself in a position to say, ho-hum: Facebook, JPMorgan, they may be up, they may be down - it doesn't really matter," he says. But in a wild market like this, how can such equanimity be achieved? "The answer is contained in two words," Mr. Markowitz, 84, told me last week. "They are "portfolio selection," and they are the two most important words I ever wrote." Those words are the title of a now-canonical paper that he developed as a graduate student at the University of Chicago and published in 1952 while working at the RAND Corporation in Santa Monica, Calif. The math behind it is complex, but the basic thought is not. Rational investors ought to assemble rigorously diversified portfolios of stocks and bonds with a mix of risk and return optimized for their own needs and beliefs. "The title wasn't "Securities Selection" or "Stock Selection," " he said in a two-hour telephone conversation last week. "It was "Portfolio Selection." That was revolutionary. Building diversified portfolios instead of hunting for hot stocks may not be revolutionary today - 60 years later - yet with Facebook frenzy in the air, the idea may be more important than ever. Not putting your eggs in one basket is ancient wisdom. But Mr. Markowitz's theory provided what the late Peter L. Bernstein called a coherent mathematical "process for investing." "Markowitz's most original contribution was his insistence on distinguishing between the riskiness of an individual stock and the riskiness of an entire portfolio," Mr. Bernstein, formerly a contributor to Sunday Business, wrote in the book "Capital Ideas." At its simplest level, Mr. Markowitz said last week, his theory translates into this advice for unskilled investors without inside knowledge of the market: Forget about individual stocks like Facebook and buy broad low-cost stock and bond index funds instead. Allocate them in a proportion that gives you a level of volatility with which you are comfortable. Understand that with more bonds and, presumably, less risk, you may end up with a lower long-term return, he continued. Rebalance periodically, and change the allocation if your needs or beliefs change. Then, unless investing is your hobby or profession, move on (or employ a professional to customize a portfolio for you). Enjoy yourself. Do things that are personally more rewarding. Born and reared in Chicago, where his parents, Jewish immigrants from Poland, ran a grocery store, he read copiously as a boy, starting with comic books and adventure magazines like "The Shadow" and "The Green Hornet," and extending to serious works of philosophy. David Hume's skepticism has had a lifelong impact. In a brief autobiography Mr. Markowitz wrote in 1990, he said he was struck by "Hume's argument that, though we release a ball a thousand times, and each time, it falls to the floor, we do not have a necessary proof that it will fall the thousand-and-first time." Such skepticism is embedded in his theories. He does not, for example, make absolute claims about future portfolio returns or investor behavior. And he advises caution about "financial engineering" - including hedges like the one made at JPMorgan - which can wreak havoc if not perfectly calibrated. We live in a condition of fundamental uncertainty, he said, and must make difficult decisions based on changeable beliefs. "We're always making choices," he said. Even if you try to rely on history as a guide, you're making a choice. Which history, which years, which investment returns are you using? And if the facts change, your beliefs may need to change - that's natural. But you can use a rational process" to incorporate those beliefs into your portfolio. He observed that investor behavior is often idiosyncratic, and certainly much more complex than traditional theory allows. In fact, his 1952 insight that people respond to changes in wealth - as opposed to states of wealth - provided one of the main building blocks of behavioral economics, according to Daniel Kahneman, who cites Mr. Markowitz's theories in his recent book "Thinking, Fast and Slow." Mr. Kahneman, a professor emeritus at Princeton, was a Nobel laureate in economics in 2002. At the University of Chicago, where Mr. Markowitz earned his undergraduate and graduate degrees, he became interested in "the economics of uncertainty," a lifelong pursuit. He said several "giants" were his teachers, including Leonard J. Savage, Jacob Marschak, Tjalling C. Koopmans and Milton Friedman. Both Mr. Koopmans and Mr. Friedman also won Nobels. Mr. Friedman taught him "Economics 101" and had a major influence, advising him to "read Adam Smith, which I did and I do," he says. When Mr. Markowitz defended his doctoral dissertation - a treatise on portfolio theory - Mr. Friedman raised a disturbing objection. Portfolio theory wasn't economics, Mr. Friedman said, and the university couldn't grant a degree in economics based on it. A few minutes later, Mr. Markowitz learned that he would receive his degree after all, but he endured some nervous moments. Years later, Mr. Friedman clarified his position somewhat, telling Mr. Markowitz that while he was startled by his student's novel approach, he was kidding about not granting the doctorate. "Harry, you know we don't flunk anybody at that late stage," Mr. Friedman told him. Now, Mr. Markowitz says: "It's possible he really didn't think it was economics. It's O.K. At the time it was not economics - but now it certainly is.