Pursuing an evidence-based investing approach

25 Sep Pursuing an evidence-based investing approach

We are often asked about the reasoning behind our investment approach and although related to a different field, we feel the following tale perfectly illustrates our philosophy.

In the early hours of a December morning in 1799, physicians were called to examine a recently retired gentleman battling a cough and cold. He had spent the previous day on horseback in the rain, supervising workers on his estate.

Sadly, after many rounds of bloodletting and many doses of mercury, he passed away. The interesting part of the tale is that this was in fact no ordinary man. It was in fact George Washington.

Although unsuccessful in this instance, bloodletting was common practice and had been over the course of the past millennium. This practice however was not validated through scientific and clinical trials, it was merely passed from one physician to another, much like the inheritance of a simple skill.

This changed in 1921, when British statistician Austin Bradford Hill devised the blueprints for the randomized, controlled trial and from this point onwards (although adoption of the technique was slow) medicine began to look a lot more like the controlled and empirical field we now know it to be today.

You may be asking, what is this got to do with investing? Well, at Tandem, we base our investment approach on decades of capital market-based academic research.

Over the last 50 years, a significant body of research has been put together by leading academics and practitioners, from William Sharpe’s groundbreaking research on the relationship between risk and reward, to Nobel Prize winning economist Gene Fama’s factor models. At Tandem, this research has dramatically enhanced our understanding of the investment markets and has shaped our perspective on markets.

Sadly, much of the financial industry adopt what can be best described as a make-it-up-as-you-go-along approach by focusing on marketing, stock-selecting and chasing well-performing assets. Our approach at Tandem is to focus on asset allocation and managing the investor’s behavior, by separating emotion from data and ensuring our clients make the right decisions.

An evidence-based investment approach has also enabled us to avoid questionable financial products. We take the view that if an investment vehicle’s existence is not founded upon rigorous testing, it does not deserve a place in our clients’ portfolios.

The end result is that our clients can invest with greater confidence and will sleep more soundly, knowing that their assets are being managed responsibly and effectively.