Evidence Based Investing
Is evidence based investing even possible? Probably not, but it’s a better place to start than most.
To be functional evidence based protocols must include several aspects:
- Is the evidence objectively correct?
- Are the interactions with other objectively correct information known under all conditions?
- Can the evidence and its connections be explained by anyone?
- What entry behaviour is required for another person to understand what they are told?
- Can you do that without stories, analogs and specific examples?
Evidence never sells itself. It must exist and be capable of communication to another.
All in, three things will matter.
- Is there real evidence?
- Can it be interpreted uniquely? If it can mean several things it is not really evidence.
- Will anyone get the real message?
Again, probably no hope for rigorously applied evidence based investment. People have biases that bend the facts.
Instead, rely on probabilities instead of provable facts. For some things there is persuasive evidence. These include:
- Private equity deals require far more skill than most investors possess.
- The average investor will not learn much reading the financial statements for Bank of America or any other big company.
- Companies with established products, management and distribution systems are hard to dislodge.
- Products you use can tell you quite a bit about the business that makes them. Customer service is expensive to do right and will tell you about their value added philosophy.
- Some businesses require fantastic amounts of capital while others are more lean. Lean ones can spin off more cash.
- Some businesses are hard to get into. Reduces competition.
- The cost leader always has an advantage.
- Big market share is hard to acquire and provides a benefit.
- Nobody can make huge returns forever.
- The future may look like the past and the present. Some businesses will evolve, others will go away. Success will occur for a reason. The economy as a whole will grow.
- Productivity gains are valuable.
- Investors must understand taxes and time.
- Investors must have reasonable expectations.
- A lot of risk comes from doing things you don’t know how to do.
- If you can reverse a decision for little cost, there is no inherent risk.
- No one is right every time.
The overview is avoid losing or cut your losses quickly. Have reasonable expectations about what is possible and what is possible for you. Don’t be in a hurry. Notice costs and taxes.
Science writer and science historian Michael Shermer seems to have it figured out the flaw in evidence based investing.
Humans are pattern-seeking, story-telling animals, and we are quite adept at telling stories about patterns, whether they exist or not.
Evidence won’t do it by itself, because we all have a narrative that goes with the evidence. Do not tell yourself a story based on objective facts and wishful analysis. Evidence won’t make that work.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772