Don’t Believe the Rules in Investing

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We would like to think that investing is a science, but, alas, it is not. Water freezes at 32 degrees Fahrenheit. Light travels at 186,000 miles per second. When you throw a ball into the air, gravity always brings it back to Earth. We look for similar rules in investing.

There are none.

Undeterred, we turn to academic research and data to provide answers. If investing is a probabilistic activity rather than a hard science, can we gain an advantage by studying the past? Does the past repeat itself sufficiently and regularly enough to give us a reliable edge?

We believe so.

We apply labels like “evidence-based” and “smart-beta” to our data-driven, historically dependent investment strategies to suggest their superiority. We infuse them with an air of precision using complex math and ratios named after semi-famous people. We cloak them with a patina of empirical validity using Greek and Latin terms and graphics that look back 100 years.

But are any of these strategies based on rules or principles that can be relied upon over reasonable future time frames to consistently produce superior results for investors? Or are we all just accepting investment risk and mistakenly, or perhaps intentionally, mislabeling our luck as skill?

Since we are so fond of data, research, and evidence, let’s look at some.