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.
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.
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.
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 re-balancing and cost control that can add value as well. You can learn more about these by reading our “investment approach” section.
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.
Here’s a recorded presentation of our philosophy and how it guides us in building and managing broadly-diversified global investment portfolios: