Should an investment philosophy be data-driven?

In today’s high-tech world, saying you’re “data-driven” has become something of a mandatory for businesses and financial managers. But should your investment philosophy be data-driven? We think “What do the data say?” and “What data would I need to confirm an intuition- or experience-derived belief?” are good questions, and ones that should be asked in order for an investment philosophy to remain vital and grounded in reality. But we do not think that an investment philosophy should be driven by data.

To say an investment philosophy must be data-driven asks more of data than it can deliver. Intuition and personal experience are key ingredients in the development of any belief system, and an investment philosophy is no different. Not all convictions about the markets—or good investment decisions—can be backed up with verifiable data. The nature of investing is to act now on the expectation of future events, and investors are rewarded for being correct ahead of the competition. Sometimes the data don’t reveal themselves until the future has become the past.

Our view is that an investment philosophy should be data-engaged, not data-driven. By data engaged, we mean that holders of an investment philosophy should:

  • Be aware, or strive to be aware, of the data that bear on the problems the philosophy is meant to address and attempt to learn as much as they can from this data.
  • Think about what data would be useful to validate their core beliefs and strive to gather that data.
  • Modify their beliefs, as appropriate, based on a holistic consideration of such data within the context of their professional experience and intuition.

To learn more about the benefits of investment philosophy, we invite you to read our recent paper, “Rethinking Investment Philosophy,” by John Minahan and Thusith Mahanama.* Just click on the link below to read an executive summary.


READ EXECUTIVE SUMMARY


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