Evidence Based Investing for Dummies

“To hell with facts, we need stories!”- Ken Kesey

The most important ingredient in creating an investment portfolio is evidence. Unfortunately, according to Michael Shermer, “Humans are pattern-seeking, story-telling animals, and we are quite adept at telling stories about patterns, whether they exist or not.”

The average investment plan of many retail investors consists of large positions allocated amongst what Courtney Love would have referred to as, “might have been” and “never was.”

Last week our firm sponsored the very first Evidence Based Investing Conference in New York City. This day was filled with compelling data that would make IBM’s Deep Blue computer implode.

The guest speakers were terrific and the data-driven investment approach they preached about is absolutely indisputable.

Most of the attendees were zealots to this righteous cause. As I listened with rapt attention to some of the brightest investment minds out there, something bothered me.

How do we get this terrific message out there in a way the average Joe or Jane can understand?

While I enjoyed several 40 minute or so presentations on this fascinating topic, 95% of the general population would find these debates (to be polite) less than compelling.

That is the dilemma; how can this vital message be relayed to those who need it most?

Evidence based investing is the best and most important defense against the marketing industrial complex that dominates the financial services industry.

This hits home for me. I mainly deal with public school teachers who have little interest in the details but just want to work with a financial professional whom they can trust. If they were fascinated by investment theories, they would be managing their money themselves.

As I listened, I came up with something akin to “An Idiot’s Guide to Evidence Based Investing.” Here are some simple, yet vitally important concepts that every investor could benefit from understanding:

  1. Costs matter – Imagine starting the 100 yard dash 15 yards behind everyone else. Even Usain Bolt would find it impossible to win on a consistent basis! The same can be said for mutual funds. Funds that cost 1.5% a year seldom beat the market. Low costs and good performance go hand in hand.
  2. Look for bargains – Buying peeps after Easter can be an incredible bargain. The same products can be twice the cost a few days before the holiday. Your “peep performance” will double by using this strategy. This is also true for stocks. Buying “value” stocks, (those stocks which have a low price given their earnings’ potential) rewards investors over DECADES.
  3. Nothing is certain – Life is best looked at in terms of the “probability” of something occurring rather than its certainty. Would you believe a weatherman if he said he was “100% certain that we will have 30 inches of snow in January of 2019?” If your answer is “no” then why would you listen to people on TV telling you future stock prices or levels of the market months or years out into the future? Avoid forecasts at all costs.
  4. The future is for the young – The people in our society with the greatest potential to do great things are children and young adults. The simple reason is they will live much longer and have many opportunities to recover from their mistakes. The same goes for smaller stocks. Over time, they tend to give investors the highest returns over LONG periods of time because they have the greatest potential to grow.
  5. Don’t be impressed by fancy words – Imagine reading the sports pages and seeing this sentence: “Clinging to one another like leeches, Federer and the puissant lefty, 22 year old Nadal…” Puissant means powerful. When I see this, the first two words that would come into my head are pompous and pretentious. The same can be said for investing. If your advisor starts throwing around, Sharpe ratios, alpha, beta, and merger arbitrage, it’s time to find a new advisor.
  6. Your behavior means everything – Even if you find the perfect spouse, it’s pretty easy to ruin the relationship; start drinking, having affairs and acting abusively and things will go downhill pretty quickly. The same can be said for investing. Combining emotional behavior with bad investment decisions are a sure way to destroy the most carefully constructed evidence based investment plan.

There are many more investing concepts that can be proven with data and evidence. This is a start for a five minute financial conversation that the average person can understand and, more importantly, apply.

It is up to us to get the message out there to the people who really need it. Evidence shows everyone has a different learning style and people need to understand that what you are teaching matters to THEM, not you!

It’s time to start Evidence Based Investing 2.0. Preaching to the choir is not enough; the message has to be spread to the church of the entire investment community.

This is one religion where we can all find common ground.



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  1. Demystifying Evidence-Based Investing commented on Nov 30

    […] not everyone agreed on everything – not by a long shot! But several important themes emerged. “Teachable Moment” blogger Tony Isola did a good job of summarizing some of the biggest ones. We’d like to focus on two of particular […]