It goes without saying that the beliefs behind an investment philosophy are, by definition, deeply held. But should they be cast in stone, even when new information challenges those beliefs?
We don’t think so.
Taking a cue from the 19th century philosopher and psychologist William James, we can divide beliefs into three categories: those that are supported by data; those that are contradicted by data; and everything in between. Beliefs that are neither supported nor contradicted by data—the middle ground, as it were—are constantly migrating to the other two categories as new data emerges and new things are learned. Because an investment philosophy may be built, in part, on beliefs from this middle ground, it needs to be living. As investment firms grapple with confirmation and disconfirmation of their belief system, they need to remain open to new learning. If they modify their investment philosophy thoughtfully in response to new data or changing circumstances, we see that as a good thing.
This doesn’t mean a philosophy should be constantly changing. But we do think is should be constantly re-examined and open to change if that is what the ongoing development of knowledge requires.
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.