Note: Please read the disclaimer. The author is not providing professional investing advice.
In one of Ayn Rand’s books there is a passage about why she deplores prejudice. To paraphrase, she says that it causes you to make up your mind before seeing the facts, which blinds you.
To us science types, could there be anything more intellectually lazy than drawing conclusions about an experiment before you’ve seen the data (or worse, drawing conclusions in spite of what the data says)?
But it’s easy to do and it’s one of the reasons I no longer belong to a political party. When I was affiliated with a specific group, I tended to only see the good in the candidate from my party and vice versa – so much for my being an objective scientist.
When it comes to investing philosophies, there are quite a number of different belief systems – which people will defend as vehemently as their chosen political party or religion.
Some example methodologies:
• Value investors and fundamentalists put emphasis on earnings and what is contained in the income statement and balance sheet.
• Technicians may never look at financial filings or even understand their stocks’ business models, but trade purely based on trends, patterns, moving averages, neural network price predictions, etc.
• Other investing types care about neither technicals or fundamentals, but will invest if the company has a good, believable story about how it’s going to make it big and change peoples lives.
• Some buyers like fundamentals, but base their trading on the projected future growth, perhaps ignoring what has happened in the past.
• Some feel that the pros must have a better business education and/or insider information and therefore trade on analysts’ recommendations.
• Still others follow the “performance chasing” or momentum approach, in which you buy was hot last quarter or last year in the belief that it will continue to be.
• Others do a variation on the above, often referred to as “knife catching” or bottom fishing where they buy precisely what has recently performed the worst in the hopes that they are buying low to later sell high.
• Still others follow a sector rotation type of investing in which they attempt to follow previously recognized cyclical patterns in which industries lead or lag the others.
So which is your investing style? Is there any reason to limit yourself to just one? The fact is, according to Value Investing for Dummies, all of these styles make money some of the time, but none make money all of the time.
You may find yourself interested in value investing because you’ve been burned recently trying to follow perceived trends that turned out to behave more like random processes. Or you may pooh-pooh the large amounts of research time required for value investing as lately you’ve made a pretty penny just following analyst recommendations.
If you’re into personal cognitive development, you may have heard of integral theory, espoused by Ken Wilber. Roughly the philosophy is that when it comes to fields such as business, medicine, politics, spirituality, or art – where there are many competing belief systems and each claims to have the whole truth – none has in fact cornered the market on reality completely.
For example, in the field of politics are the Republicans all bad and Democrats all good? Or could you perhaps get the best of both worlds if you integrate the two ending up with a philosophy that is socially liberal but fiscally conservative?
So what would an integral investing strategy look like? Well the point with integral theory is not at all to blindly accept all theories from all schools of thought as equally valid. We’re after the truth in whatever way it may present itself. So we have no problem excluding any theories that either don’t make sense or have proven in the past to be misleading or irrelevant. But we stay objective and open to any ideas that we haven’t thoroughly investigated.
So for example we may largely be value investors and be quite comfortable with this style of trading. But what if we’re presented with the (technical) evidence that usually once a stock’s price rises a large percentage above it’s 50-day moving average, a significant pullback is likely? We may still screen for stocks using our value principles but wait on any purchases where the stock is greatly extended above its 50-day.
So be open to all possible algorithms from all investing styles, but only incorporate them into your personal strategy once you become comfortable (through back-testing, probability, simple logic, etc.) that the technique is sound more often than not. And ideally, only trade when the vast majority of your indicators are saying the same thing.