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| Our Approach to Managing Investments |
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| There is a science of investing.
The body of knowledge for this science is often
grouped under the heading Modern Portfolio Theory or
MPT and it all began in 1959 with the publication of
Harry Markowitz's classic book "Portfolio
Selection." Markowitz would go on to win the Nobel
Prize in Economics for his groundbreaking insights.
This work was expanded upon by Stanford's William
Sharpe (another Nobel winner), Eugene Fama, Merton
Miller, and many others (we suggest several
excellent histories of the field in our "recommended
reading" area). While markets are complex adaptive
systems too chaotic to allow for perfect prediction
or control, we have learned much about how to
control risk and capture returns. There is a
science of investing. |
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| Unfortunately, much of what
passes for investment activity has little connection
to this science. Too many offerings are built on
hope and fantasy and lack the theoretical
foundations and necessary rigor for consistent
results. It sometimes seems that this world of smoke
and mirrors holds center stage in the media. To
some degree, this comes from the natural human
desire to "beat the system," to gain some special
advantage, to find the secret short-cut. Many
advisors trade on these impulses and offer
investment strategies that are long on hope and
short on science. Our policy when it comes to
investing is simple: no baby talk. If we don't
believe a particular approach adds value, we won't
offer or accommodate it. When we make
recommendations it's because we believe there's a
sound theoretical and practical foundation for
success. |
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| At the end of the day, success in
investing is more about discipline than it is about
beating the system by picking hot stocks or timing
the market. We believe that markets work, so
there's really nothing to "beat." Markets
exist to set security prices such that the
subsequent returns will be commensurate for the
risks taken. Over time and in the aggregate, markets
do an excellent job of this. There's a collective
wisdom that emerges from the buying and selling
activities of all the market's participants that no
single individual, no matter how intelligent or well
educated, is likely to improve upon. The
question of whether or not individuals can
consistently outperform the market has been
addressed systematically again and again and the
same answer is always returned: they cannot do so.
And why should we ever think they could? The
market, after all, represents the aggregation of
each participant's insights and knowledge and is
truly an example of two heads (or two million) being
better than one. |
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| All of this is not to say there
aren't ways to add value short of active stock
picking. There are unique sources of risk and
return that can be identified and harnessed. There
are disciplined approaches to rebalancing and cost
control that can add value as well. You
can learn more about these by reading our "investment
philosophy" section. |
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| In the end, successful investing
comes from knowing why you want to invest, accepting
that there are no shortcuts, and engaging in a
long-term, disciplined process that is guided by
empirically-validated knowledge. This is our
definition of "grounded wisdom" and this is what we
offer. |
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