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A Few Notes on Odds On: The Making of an Evidence-based Investor

| | Posted in: Big Ideas, Strategic Allocation

Matt Hall, cofounder and president of Hill Investment Group, introduces his 2016 book, Odds On: The Making of an Evidence-Based Investor, by stating that: “…the evidence-based movement has been studying market data and academic research to identify the groups of stocks and other investments that provide better odds of long-term success. …I’m inviting you to learn how evidence-based investing could change your life…” Based on his experience, he concludes that:

From Chapter 6, “An Epiphany” (Page 70): “Instead of trying to outsmart the market and pick individual investments, guys like Swedroe invested in entire categories of stocks and bonds in order to capture the overall growth of the global markets…without putting too many eggs in any single basket. …they held those stakes for the long haul, riding out the market’s temporary ups and downs and avoiding all the bad bets and excessive fees…”

From Chapter 8, “Joining the Movement” (Pages 84-85): “”Investors who try to outguess the market’s verdict on an asset typically get it wrong more often than they get it right. As a result, their losses, especially when combined with the cost of the hunt (taxes and fees), will outweigh whatever gains they achieve. …The Moneyball geeks were passionate about using data, evidence, and statistical analysis to build better baseball teams. We were passionate about using data to build better portfolios.”

 From Chapter 10, “The Big Rocks” (Pages 100-101): People who embrace evidence-based investing can skip the distractions. Instead, they can choose a mix of investments based on the best evidence about how markets perform over time and then hold on to those investments for the long term. They can tune out the noise from the investing world and focus on living their lives. As a result, they will probably achieve better investment returns, and they will improve their odds of finding happiness.”

From Chapter 11, “What About Warren Buffett?” (Page 110): “Why didn’t more people get this? After a while, I realized that it wasn’t just Wall Street that was in love with its broken model. Investors themselves had a hard time letting go of the idea that they could win by picking the right investments or betting on the hottest fund managers. Our task felt a lot like try to get people to exercise more or eat healthier.”

From Chapter 12, ” The Island of Idealism” (Page 121): “…we were especially frustrated to see that brokers without science were still winning most of the clients and controlling most of the money in the market. …style still trumped science for a lot of clients. We hit this wall again and again. Each time we wondered anew: How could we  stop investors from falling for Wall Street’s marketing machine?”

From Chapter 14, “Doctor’s Orders” (Pages 145-146): “Sometimes you can help people make better decisions by not answering their questions. At a certain point, they need to be told to set aside their need for certainty and focus on a strategy that, while it can’t provide any guarantees, will give them the best odds of achieving their goals. Our clients need leadership and direction, but we’d been letting them take the lead. …Science backed by compassion, clarity, calm, and focus.”

 From Chapter 15, “The Human Factor” (Page 157): “…we’d try to make one thing clear: We were not offering any promises or even predictions about the returns our clients might achieve. The reason? No matter how much we study the evidence, we simply don’t know how markets will perform in the future. However, we’d draw people’s attention to the odds. We were confident that our investing strategy offered the best chance for success based on the evidence available. Until there was new evidence telling us otherwise, we believed it was best to act on what we knew, admit what we didn’t, and be prepared to ride out whatever came along.”

From Chapter 16, “Stacking the Odds” (Page 170): “Our investment decisions are rooted in a crystal clear understanding that the premium we’re after truly exists–and can be captured cost effectively. Our mantra goes like this: A premium must be persistent, pervasive, and liquid. If it doesn’t meet all three criteria, we ignore it.”

From Chapter 17, “We’re Winning” (Page 181): “…we offer people both a rational investment approach that helps them achieve their financial goals and a relationship that provides a safe space to process their emotions about money.”

In summary, investors and investment advisors/managers will likely find Odds On an entertaining recollection of the author’s discovery of, and development of a practice implementing, investment strategies based on formal (academic) research.

Cautions regarding conclusions include:

  • Increasing exploitation of premiums discovered via formal research, as described in the book, suggests the possibility of crowding that could extinguish/reverse the premiums. How can past premiums persist if most investors pursue them? See “The Adaptive Markets Hypothesis”
  • Much evidence about financial markets impounds data snooping bias that overstates the magnitude/reliability of discovered premiums (see research on “overfitting”). 
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