My friend Michael Batnick just wrote a post titled I Don’t Think That Means What You Think it Means. In it, he discusses the challenge in defining a term that has picked up a ton of steam in the financial advisor community over the last few years: Evidence Based Investing.
“Ask ten different investment professionals “what is evidence-based investing?” and you’ll get ten different answers. Not different variations, but completely different responses. One person’s evidence is another person’s nonsense.”
One thing I have learned about Evidence Based Investing over the years is that it’s less a map telling you exactly where to go and how to get there and more an internal compass of investing principles that are supported by data, theory and common sense.
I asked a group of investment industry friends and colleagues what Evidence Based Investing, or EBI, means to them…in ten words or less. When Barry Ritholtz sent me his response, he noted that working around constraints can serve as a source of creativity and innovation. Based on the responses below, he couldn’t have been more spot on.
Mike Batnick, The Irrelevant Investor, @michaelbatnick
Find what works for you and eliminate what doesn’t.
Morgan Housel, Collaborative Fund, @morganhousel
Works on both a chalkboard and in real life.
Toby Carlisle, Carbon Beach Asset Management, @Greenbackd
Have one eye in the land of the blind.
Lawrence Hamtil, Fortune Financial Advisors, @lhamtil
Evidence Based Investing is the triumph of experience over hope.
Jeff Ptak, Head of Global Manager Research at Morningstar, @syouth1
Investing based on data, not narrative, in a dispassionate way.
Ben Johnson, Director of Global ETF Research for Morningstar, @MStarETFUS
Long data, short narratives.
Eric Balchunas, ETF Analyst for Bloomberg Intelligence, @EricBalchunas
Just ’cause you feel it, doesn’t mean it’s there.
Cullen Roche, Pragmatic Capitalism, @cullenroche
The triumph of empirical expectation over empty & expensive emotions.
Dan Egan, Director of Behavioral Finance and Investing at Betterment, @daniel_egan
Actively test and adapt. Seek disconfirmation. Be skeptical. Build systems.
Dr. Daniel Crosby, Nocturne Capital, @danielcrosby
Backed by data, founded in reason with roots in behavior.
Brian Portnoy, Virtus, @brianportnoy
Stories without evidence are just myths.
Corey Hoffstein, Newfound Research, @choffstein
Statistics can never prove a positive; be skeptical.
Wes Gray, PhD, Alpha Architect, @alphaarchitect
Synthesizing all available evidence to make an informed objective decision.
Jack Vogel, Alpha Architect, @jvogs02
Behavior, Theory, and Data.
Ryan Kirlin, Alpha Architect, @RyanPKirlin
Strip away seniority, eloquence, volume of fluff, fear and indifference.
Adam Butler, ReSolve Asset Management, @GestaltU
The plural of anecdote is not data.
“Jake”, EconomPic blog, @EconomPic
Garbage In, Garbage Out.
Charlie Bilello, Director of Research at Pension Partners, @charliebilello
Past performance may be indicative of future probabilities.
Nick Maggiulli, Of Dollars and Data blog, @dollarsanddata
Fear is loud. Evidence is quiet. Listen to the evidence.
Jim O’Shaughnessy, O’Shaughnessy Asset Management, @jposhaughnessy
Unemotional use of time-tested strategies with best base rates.
Anora Gaudiano, MarketWatch, @AnoraJourno
Investing with acknowledgement and humility that future returns are truly uncertain.
Peter Lazaroff, Plancorp, @PeterLazaroff
Using process and accountability rather than speculation and narrative.
Isaac Presley, Cordant Wealth Partners, @SeekingDelta
Maximizing your probability of success versus trying to sound smart.
Josh Brown, The Reformed Broker, @ReformedBroker
Evidence based investing or you can go back to astrology. Your choice.
Barry Ritholtz, The Big Picture, @ritholtz
1. Avoid Heuristics
2. Context matters
3. Rely on Data
4. Stop fooling yourself
Perth Tolle, Life + Liberty Indexes, @Perth_Tolle
Empirically proven solutions that also make intuitive sense.
Tadas Viskanta, Abnormal Returns, @abnormalreturns
Investing on faith, not facts, is a fool’s errand.
Bob Seawright, Above the Markets, @RPSeawright
A relentless focus on what works, what doesn’t, and why.
Andrew Miller, Miller Financial Management, @millerak42
Applying the scientific method and behavioral economics to investing.
Robin Powell, Ember Regis Group, @RobinJPowell
Basing investment decisions on peer-reviewed, time-tested, academic evidence.
Elisabetta Basilico, Academic Insights on Investing, @ebasilico
Investing without emotions by following systematically rigorous research insights.
Jeremy Schwartz, Director of Research at WisdomTree, @JeremyDSchwartz
Mostly getting smarter with your betas, not alphas.
Keep your forecasts, feelings, and
From investment selection.
(Editor’s Note: +1 for the Haiku)
Brendan Mullooly, Mullooly Asset Management, @BrendanMullooly
Data over dogma.
Danny Noonan, Portfolio Manager at Huber Financial Advisors, @_DannyNoonan2
Throwing the forecasts and predictions in the garbage. Facts only.
Taylor Schulte, CEO of Define Financial, @DefineFinancial
Combining data, logic, and science to help improve investment returns.
Christie Jones, Children’s Health Investment Office, @ROIChristie
Replacing biases and gut feelings with intellectual honesty.
Now I guess it’s my turn. Like many of the respondents, I found it quite challenging to keep it under ten words. I decided to give myself a little loophole by going Full Nerd and creating an Evidence Based Investing equation:
In each of the above ratios, your numerator should be higher than your denominator. Since we obviously can’t precisely quantify these metrics, think of it as more of a personal scorecard. If you assess yourself honestly and come up with an overall “EBI Score” of greater than five, you are well on your way to being a bona fide practitioner of Evidence Based Investing.
I’d be remiss if I didn’t plug the 2nd Annual Evidence Based Investing Conference (East) next week in New York City, hosted by Ritholtz Wealth Management and IMN. It was the best conference I attended last year and I am already overflowing with FOMO for not being able to make it this year. The agenda is stacked and it is sure to not disappoint!