How To Develop A Scientific Investment Approach

I think people need to have an investment philosophy just like they have a personal philosophy. Now, an investment philosophy ought to be based on ideas that are empirically testable and that kind of leads to a scientific approach. So we try to base our investment philosophy on leading academic research that has been done over the last 50 years or so.

Capital markets behave in a way that we think you’d like to have them behave, the markets are where buyers and sellers come together and if a stock market is doing its job well, in an ideal stock market, both buyers and sellers are getting a fair price. That’s kind of the cornerstone of what we believe.

Now, prices fluctuate a lot so on any particular trade, either the buyer or the seller, will turn out to have gotten a better deal than the other side. But on average, over long periods of time, do both buyers and sellers get a fair price? The answer appears to be yes if you look at the numbers on the Dalbar study of 2012.

There may be other investment philosophies other than ours that work. But one philosophy that’s not going to work is to shift around all the time, try something for a while and try something else; you might experience unfavorable repercussions like paying unnecessary costs and taxes as are some of the findings in the Dalbar study points out. What you need to do is sit down and agree with the client.

Let’s create an investment philosophy that you can live with through thick and thin because about once a generation we get something like 2007, 2009, where the market drops by half. I’ve lived through it in ’73, ’74. If you’re lucky enough to live long enough, it’s going to happen again. So let’s think through how markets work and come out with an overall solution that is appropriate for you.

I think over the long haul, if you take the scientific approach, people may be more likely to be able to relax a little bit and might get the feeling that they are going to be okay. And I think that’s what the role of the adviser is, give them the opportunity for good returns, but give them a great overall experience.

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