Nancy Graham CPA, CA, CIM, CFP, TEP

Portfolio Manager
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Predictable Problems with Random Patterns

January 4, 2016 - 0 comments

At PWL Capital, we embrace a practical approach to investing - making use of the significant body of academic research that supports ‘market return based’ or ‘evidence-based’ investing. In other words, forget about gut feeling. What does the data tell us about investing?

But then “data” can be slippery, tricking us into confusing purely random patterns with reliable results. To demonstrate the difference, a November 2015 study by the City University London’s Cass Business School built a stock index weighted according to a clearly random factor: the SCRABBLE® scores for its stock holdings’ market ticker symbols. They then compared the performance of their new “SCRABBLE® index” to a traditional, market-cap weighted index during the past 50 years. As it so happens, their index beat the pants off of traditional index investing.  

Who said academics don’t know how to have fun … and make an important point at the same time? The exercise shows us that we don’t want to heed just any evidence. We want the kind that’s been rigorously peer-reviewed, and repeatable across varied timeframes, global markets and multiple academic inquiries. Only then, at PWL, do we consider this to be evidence worth investing in.

By: Nancy Graham with 0 comments.
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