A Hybrid That Converts Junk Bonds To Triple A?

Geometric Precision

As he strolls the grounds, it’s quickly evident that the proprietor of Stone Edge Farm is a man of eclectic tastes.

Vegetable beds teem with squash and tomatoes and 40 125- year-old olive trees have been replanted with geometric precision in parallel rows. McQuown, who grew up in a farming family in northern Illinois, employs his own arborist to tend to the live oaks and California bay trees on his estate.

He’s inclined to go overboard when he delves into new projects. Years ago, his wife, Leslie, bought him a backyard telescope only to see it go untouched. When McQuown finally decided he needed “to know” astronomy, he purchased a “deep- sky” telescope with a 20-inch mirror and housed it in a three- story-high observatory clad in rust-colored steel that resembles a Mayan pyramid.

“He hasn’t changed that much since I first met him more than 50 years ago,” says Fama, 76, a finance professor at Chicago Booth. “He has a basic curiosity about everything.”

Whirring IBM 7090

After earning a degree in mechanical engineering from Northwestern University and then an MBA from Harvard in 1961, McQuown embraced an emerging discipline called computer science.

As a young analyst in Smith Barney’s corporate finance unit in Manhattan, he spent his weekends renting time on an IBM 7090, a room-sized mainframe installed in the basement of the Time- Life Building.

McQuown wanted to see if he could predict how stocks would perform, so he built a database and then slept next to the whirring machine as it ran his programs. He says with a laugh that he failed in his quest.

By 1970, McQuown was leading the management sciences research division at Wells Fargo & Co. in San Francisco.

He was blown away by Fama’s theory that equity prices reflect all available information, so it’s virtually hopeless to beat the market over time.

Pre-Scientific Era

McQuown also studied Sharpe’s work. Sharpe had developed formulas, including one that came to be known as the Sharpe ratio, to quantify the relationship between risk and return and concluded, as did McQuown, that a wise way to make money in the stock market was essentially to invest in all of it.

This particular stream of thought arrived at a time when investors typically put their faith in star stock pickers.

“It was an exciting time because finance and investing were in a pre-scientific era,” recalls Sharpe, 80. “Mac was a guy who said, ‘Surely we can bring economics and mathematics to bear in this area and optimize a portfolio.’ That required algorithms and serious computing power.”

In July 1971, McQuown’s team of brains unveiled a $6 million portfolio that tracked 1,500 equities trading on the New York Stock Exchange for the pension fund at luggage-maker Samsonite.

It would take Bogle, who developed his Standard & Poor’s 500 Index mutual fund in 1975 separately from McQuown, to bring low-cost index investing to the masses through Vanguard.