Investment Philosophy Part 3

Why you need an Investment Philosophy…A lesson from Uncle Jesse and Ayn RandPart 3

If you don’t have an investment philosophy you will be more prone to be a follower.  So where do you begin?  I have included in this series a picture of the School of Athens by Raphael.  I actually have a huge painting in my conservatory at home to remind me the lesson I am about to teach you.

The painting is of some of the greatest philosophers in history.  In the middle you have Plato holding a copy of his dialogue The Timaeus and on the right you have Aristotle holding his Nicomachean Ethics.  Plato is pointing toward the sky, expressing his preference for the ideal.  Plato believed that the realm of forms is the only one that matters and everything on earth was an illusion.  Then you have Aristotle who is stretching his hand outward.  He preferred to deal with matters of reality.  You also have Socrates to Plato’s right lecturing the generals including Alexander the Great (Aristotle’s student).  On the left of Aristotle toward the bottom you have Euclid giving a math lecture.  The picture represents an incredible range of thought.  Who is right?

I ask that question because I want you to now change the characters.  What if Soros was Plato and Buffet was Aristotle? (This is just for illustrative purposes not to say either think like Plato or Aristotle) What if Euclid were replaced with Benoit Mandlebrot?  What if Socrates was Richard Dennis and the Generals Alexander the Great and Alcibiades were replace with Jerry Parker, another turtle.  Or what about Paul Tudor Jones and Steve Cohen.  You get my point.

Read George Soros’s Alchemy of Finance and compare that to Buffet’s investment philosophy that he learned from Ben Graham.  If I asked you well who is right?  The reality is that is the wrong question.  It is framed as an either or, as if there can be only one winner and one loser.  That is the problem I have seen in my career when people think about an investment philosophy.  It becomes part of their identity and they close their minds from any other possibilities. It must be their way or no other way.

The correct thing to do is study each philosophy and see if you can apply it in your investing strategy.  Is it congruent with what you believe and also do you have the foundation of knowledge to truly understand and apply it.  If you don’t it is better to have no opinion.

I was at the Market Technician Symposium recently and someone asked “Why do some Quants view what we do as voodoo?”  Yet, about an hour earlier a technician was giving a presentation and had a gorilla representing someone who used Fundamentals.  The problem I see is most people don’t look at the investment world in terms of philosophy and the philosopher kings of our time.  If they did they would not be so rigid in their thinking.  My personal journey has me exploring the various disciplines so I can appreciate not only what is done in each field but also how they think about what they do.

There is also conflicting investment philosophies within each discipline for example in the Fundamental world of investing there is Value versus Growth.  In the Technical world I have seen prominent technicians bash Elliot Wave Analysis, yet in his interview in Market Wizards when asked “…what market advisory services do you pay attention to?”  Paul Tudor Jones states …”Bob Prechter is the champion.  Prechter is the best because he is the ultimate market opportunist.  Robert Prechter is the leading authority in terms of Elliot Wave Theory.  Paul also mentioned Elliot wave Theory favorably in his forward for George Soros in the Alchemy of Finance.  I often wonder do people bash other philosophies/strategies because they have studied them in depth and have a rational explanation or is it because they can’t figure out how to use it or is it in-congruent with what they believe.  I believe behind every investment strategy you will find an investment philosophy that is important to the execution of that strategy.  It provides the foundation of thought necessary to follow the strategy.

The most important lesson I can teach you is to form your own investment philosophy because if you don’t someone else will do it for you.

Who is programming your subconscious?

Is it the media, schools, television, newspapers, some investment guru…Remember:

“The battle of philosophers is a battle for man’s mind. If you do not understand their theories, you are vulnerable to the worst among them.”

Are you acting like a detective?

“The criterion of detection is two questions: Why? and How? If a given tenet seems to be true–why? If another tenet seems to be false–why? and how is it being put over? You will not find all the answers immediately, but you will acquire an invaluable characteristic: the ability to think in terms of essentials.”

In your journey you may find investment philosophies that do not pass your litmus test.

Are you studying these just in case you run across them?

“Why should I study that stuff when I know it’s nonsense?”–you are mistaken. It is nonsense, but you don’t know it–not so long as you go on accepting all their conclusions, all the vicious catch phrases generated by those philosophers. And not so long as you are unable to refute them.

So as my Uncle Jesse told me years ago, study philosophy.  This may take a little time but it is well worth it.  Also, be sure to study philosophers with different opinions.  Understand the differences.  For example, if you study Popper make sure you read a little Feyerabend.  Have fun programming your own brain for a change.  By the way Uncle Jesse now has his P.H.D. and is living his dream as a college professor and he is truly making a difference in the world.  Now sometimes when he visits I often wonder does he regret leading me on this path because when it comes to politics and business matters, we sometimes have philosophical differences which lead to interesting intellectual debates.  My Aunt Caroline tells me she likes it when we talk because she gets to hear the other side.  However, just because we hold different philosophies I still respect his view and understand why and how he comes to his conclusions.  One of us is Plato and the other Aristotle.  Go and get started, develop your investment philosophy.

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