Some alternatives to Evidence-Based Investing

Using rules, or evidence to construct a portfolio is not new, novel or something that’s been developed in just the last few years. Systematic investing has been around for almost as long as investing has been around. It goes in and out of favor like all investment ideas do – in a cyclical manner based on whatever perceived success (or lack thereof) it’s been able to demonstrate in the very recent past.

Systematic approaches to investing are the best way to express the fact that a) the future is unknowable b) no one can reliably guess at what’s going to happen for extended periods of time and c) other approaches that rely on instinct, intuition and rapid-fire decision making are too inconsistent (and costly) to depend upon for something as serious as building a retirement plan or funding future liabilities.

But if the idea of setting the rules in advance, constructing a durable portfolio that can survive and thrive in a range of future environments and then letting asset markets do what they do is not appealing to you, that’s okay.

Here are some alternatives…

1. Hourly, daily, weekly and monthly account activity
2. Constant decision making based on the unlimited amount of variables that affect market outcomes
3. Endless monitoring of news and opinion and the requisite portfolio adjustments that this sort of thing implies
4. Researching thousands of publicly traded securities on an ongoing basis
5. Chasing hot managers and pretending there is a such thing as persistence of performance (there isn’t)
6. Chasing hot investment themes and pinpointing the moment they’re about to cool off
7. Chasing hot strategies and ignoring the fact that mean reversion is the gravity of the investing world
8. Making calls based on gut feeling and emotion
9. Leaning toward biases because of past experiences or the last article you read
10. Taking tips from pundits, brothers-in-law, anonymous people on Twitter
11. Confusing market commentary for financial advice as opposed to contextual information / entertainment
12. Calling tops and bottoms based on (choose technical indicators, valuation metrics, pop culture moments)

There are probably people who can make the above things work for them, singularly or in some sort of combination. These people are few and far between. For the majority of investors, no such thing will ever work, or, if it does, it won’t work for long. The popularity of evidence-based investing has grown with the internet age, and should be thought of as an evolution. Evolutions, as opposed to revolutions, are rarely reversed once they take hold.

This is not to say that investors who become well-behaved and aware of their own limitations will  stay that way forever. Some will, some won’t.

There will be a time in the future where people abandon these newly adopted truths and go do something else that feels good at the time. This sort of shift leads to precisely the market inefficiency that allows systematic investing to work even better, once it occurs. Evidence-based and systematic investors should learn to embrace temporary bouts of extreme behavior on the part of their peers and even the manias that periodically pop up here and there.

The harvestable errors of emotionally unaware people in the marketplace are a bumper crop for the patient, the sane and the disciplined.