Why Evidence-Based Investing Always Wins in the End

Ron Suskind on investing.

Morgan Housel
Morgan Housel
Feb 4, 2013 at 10:27AM

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.