Why Evidence-Based Investing Always Wins in the End

Last year, Rex Huppke of the Chicago Tribune wrote a half-serious article on the death of facts. "To the shock of most sentient beings, Facts died Wednesday, April 18, after a long battle for relevancy with the 24-hour news cycle, blogs and the Internet," he wrote.

Today's investors face a similar assault on rationality. Traditional investing, which involves carefully studying a company's fundamentals and holding for long periods, has become a sideshow to the practice of short-term noisemaking, high-frequency trading, and blind speculation. It isn't that real investing doesn't work anymore -- quite the contrary. But it's amazing to see how few seem bothered by what does or doesn't work -- or, in Huppke's case, what is factual.

Last week, I sat down with Ron Suskind, a Pulitzer Prize-winning author of five books. We got to talking about Berkshire Hathaway and (NYSE: BRK-B  ) Warren Buffett, whom Suskind has interviewed and written on in the past, which led into a conversation on evidenced-based investing. Have a look (transcript follows):

Ron Suskind: Is there any evidence there? That's not even a question many people ask these days. Which is, I think, a big part of what you guys do here at the Motley Fool. You're kind of evidence-people.

I wrote a story back when about Warren Buffett a long time ago. Buffett is really, I think, the champion of an ethic and an ideal. Peter Lynch was one, too, I think; he ran Magellan in the 1980s, that went up against [convicted fraudster] Michael Milken and his team for a kind of battle for the soul of the American economy. Milken and those guys were essentially doing financial innovation, naming debt "equity" and equity "debt," creating special-purpose funds, just like they are now, to create havoc in the markets and then profit from havoc that then vanishes by the next afternoon.

And it was a great model -- they made a fortune. Meanwhile, Warren Buffett's doing: "What are the fundamentals? What do they say in Graham and Dodd? Buy and hold! Buy and hold!" Well, that's actually what wins at the end of the day. And I think Buffett's done pretty well by virtue of sticking to his knitting on that, even though he's very good at trapezoidal hedges when he needs to.

Having said that, I think that right now we are at a time where the fundamentals are kind of en vogue in a lot of people's minds. They're like, "Give me some terra firma -- something I can put my feet down on. Is there evidence? Let me see it. Let me try to make sense of this based on the facts as they stand." And I think that's why the fundamental-analysis community -- the value investing community -- at the end of the day, they win. Along the way, though, they've got to pass through a wild circus of lunacy carried forward by news cycles where there is almost nothing that is material information. 

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  • Report this Comment On February 04, 2013, at 12:03 PM, SkepikI wrote:

    So Morgan, I expect this will easily be your most under-rated and least recommended piece. Likely just when its "buck-up and stick to your guns" implicit message is most useful. Perhaps you should have re-run the main chart from the "you're doing it wrong" article in this one with the title "Is there evidence we are out of Bear Country". I keep seeing the presumption we are and that alone is both dangerous and contrary to the evidence (IMHO). Better to assume Bears are present when they are not than the reverse....

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