Last week, we talked about the difference between an investment philosophy—a set of beliefs that guides your approach to investment management—and an investment philosophy statement, which is a summary of those beliefs.
But what constitutes a good active investment philosophy? First and foremost, it must address how investment opportunities come about, why some opportunities are more attractive than others, and how you identify and exploit those opportunities before others do. In our view, these are mandatory components of a meaningful active investment philosophy.
In addition, we believe an active management investment philosophy should also embody the following 3 essential attributes:
- It should be conceptually grounded.
A good philosophy needs to go beyond broad statements such as “We believe the markets can be inefficient.” In order to be meaningful, it must set forth a logical framework for that belief and explain why inefficiencies exist, when they are likely to occur, and how you are able to identify and exploit those inefficiencies before others do.
- It should be fully informed of existing knowledge.
A credible active management philosophy must be aware of theories and evidence that question the value of active management and be prepared to answer those objections with well-supported arguments. A robust philosophy doesn’t try to squash contrary theories and evidence. Rather, it frames opportunities through this body of knowledge to show why opportunities still exist and how to identify them before others do.
- It should be open to new knowledge.
A dogmatic professional philosophy is not sustainable in a field as dynamic and competitive as investment management. Managers should be open to the possibility that their beliefs may need to evolve as new conditions, facts, and ideas present themselves. Even if you never change your philosophy, simply remaining open to new ideas fosters a culture of continuous improvement and enriches your efforts to communicate and defend your beliefs.
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.
Thanks for participating and stay tuned!