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Ep 2: What's with the name?
511 Plays2 years ago
It’s time for our second audio podcast, and this week we taking a closer look at the phrase evidence-based investing. What exactly does it mean? Who started using the term, and when?
It features Wendy Cook, an investment writer in Oregon who, like me, works with advisory firms on their content marketing and investor education.
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Transcript
Introduction and Podcast Sponsorship
00:00:05
Speaker
Hello and welcome to the second podcast from The Evidence-Based Investor, brought to you by Regis Media, connecting advisors with clients. I'm Robin Powell.
Defining Evidence-Based Investing
00:00:17
Speaker
Now, I'm guessing that because you're listening to this, you're already familiar with the term evidence-based investing, or maybe you're not. Either way, I thought it would be a good idea early on in this podcast series to
00:00:30
Speaker
talk about what we actually mean by it. The term has been used for several years. Dimensional fund advisors, a company many of our listeners will know plenty about, seems particularly keen on it. But I only started using the phrase regularly myself in the spring of 2014. And that was as a result of an ongoing conversation I was having with Wendy Cook.
00:00:53
Speaker
Now, Wendy is based in Oregon from where she produces blogs and other content for financial advisors. And I'm pleased to say she joins us now on Skype. Wendy, great to have you with us. How then did the phrase evidence-based investing come about?
From Passive to Evidence-Based Investing
00:01:11
Speaker
So the name evidence-based investing, it's a fascinating history. Back in 1998, when I first entered the financial world as really a writer first and a financial person, well, I was just a regular ordinary investor when I first discovered
00:01:29
Speaker
the investing world as a professional writer. The big term that the firm I joined used was passive investing. So that was all well and good for a while, especially as we began to try to introduce the concept to the world. But eventually,
00:01:47
Speaker
It began to feel a little too restrictive in terms of what we were really doing for investors. Passive investing wasn't quite capturing it. The word itself, passive, was a bit of a turnoff. It sounds like we're not doing anything at all, whereas any kind of investing, you have to do something.
00:02:08
Speaker
Of course, a colleague of yours at Buckingham Asset Management was Larry Suedro, and I know that he particularly dislikes the phrase, passive investing. So he all along has been never shy about doing what needs to be done to serve investors best interests. And so he and people like Matt Hall, who has now published his book, Odds On, and myself and just other people around the country,
00:02:37
Speaker
began the conversation of, well, what are we going to call this if we're not going to call it passive? And so at least among ourselves, what we determined was that at the end of the day, what really matters the most in investment strategy isn't necessarily what you're doing as much as why you're doing it.
The Role of Academic Evidence and Peer Review
00:02:57
Speaker
So at the end of the day, what determines
00:03:01
Speaker
whether a strategy is expected to work over the long haul is what does the evidence tell us. So, as I recall in 2014, you wrote a blog post suggesting that we stop using the term passive investing and start using evidence-based investing instead. Now, I must admit, Wendy, I wasn't sure to start with. After all, most investment professionals would argue that they base their philosophy on some form of evidence.
00:03:28
Speaker
Yeah, well, there's evidence and there's evidence. And there's always probably going to be that debate. It's something like a big happy family where you have various viewpoints within that family and some of the viewpoints may be more valid than others. The evidence that the people I associate with or the advisors I work with
00:03:54
Speaker
tend to embrace is what we call the academic based evidence. And it takes kind of a deep dive to understand what we mean by that. It's beyond just doing an analysis, even if it's a fairly strictly done one.
00:04:11
Speaker
to ensure that the evidence is as solid and reliable as possible. Some of the qualities that we look for in the evidence that we consider real evidence is, for example, the people doing the study really should begin with a disinterested outlook, which usually involves academia versus the industry, because the industry, by definition, is going to have an interest in the outcome. So if you start with
00:04:39
Speaker
Gee, I hope the study turns out this way. More often than not that's how the study is going to turn out because some biases are going to creep in. I don't know about you, Wendy, but for me the most important characteristic of reliable evidence is that it's been peer reviewed. To test whether their findings are reliable, academics publish their research in credible academic journals and this gives other academics the chance to agree or disagree on whether the results are sound.
00:05:09
Speaker
Yeah, well, the peer review is essential because no person can, no matter how objective or academic or rigorous they are, we're all human. And we're all subject to human biases and, frankly, human mistakes. So the peer review is absolutely essential to ensuring that what one study concludes can be solid.
Validating Investment Strategies Over Time
00:05:36
Speaker
The other factor is the time, of course. It takes time for a conclusion to prove out in the real world, and that can take decades. So some of these strategies that may be referred to as evidence-based these days, some of them may be not quite time-tested as much as they probably need to be before we reach valid, solid conclusions.
00:06:02
Speaker
You're listening to Wendy Cook talking to me, Robin Powell. In a moment, I'm going to ask Wendy about the inaugural Evidence-Based Investing Conference taking place next week in New York
Regis Media's Influence and Conference Highlights
00:06:14
Speaker
City. But first, let's hear from our sponsor without whose support this podcast would not be possible.
00:06:22
Speaker
Hi, Sam Lewis here from Regis Media. We help advisors around the world to attract, retain and educate clients. We know we can deliver results, but don't just take our word for it. Here's Sam Instone, CEO of AES International, a wealth management firm based in Dubai.
00:06:40
Speaker
I think the impact of the Regis Media videos has been very positive on our organisation because it tells the story which we aspire to tell to all of our clients which have been the basic principles of good investment. They first and foremost understand the purpose of why we exist and what we're trying to do in order to help clients but the quality of what they do and the service that they have provided has also been excellent. To find out more visit RegisMedia.com
00:07:11
Speaker
Wendy Cook, we've talked about the origins of the term evidence-based investing, and it's fair to say it really is gaining traction. People are using the phrase much more often. And now, how exciting, we have our very own conference hosted next week in New York City by Rital Wealth Management.
00:07:29
Speaker
I know, isn't that amazing? When I saw that, I was like, wow, we finally made the big time. So I'm really excited about going to that, not only because I'll get to meet you, but there's just so many huge names.
00:07:46
Speaker
speaking at that conference names like Charlie Ellis who I've been reading for years and the thought of meeting him in person is pretty exciting. I think it'll also be a good venue to really begin to dig into. We're so early in the use of the name evidence-based investing. I think we're still defining it and maybe we always will be. A useful term is the English language is very flexible and a living thing.
00:08:14
Speaker
So this forum being the first of its kind, I think it'll be fascinating to hear the discussions among people, all of whom care about the term deeply, exploring its limits and its opportunities and possibilities. And I see this as just the beginning of something really exciting.
Wendy Cook's Writing Journey and Challenges
00:08:32
Speaker
Like me, Wendy, at the conference, you're particularly hoping to meet financial advisors who have an evidence-based investment philosophy. Just explain exactly what it is you do.
00:08:43
Speaker
Basically, I'm a writer. I've always been a writer since I was, oh, about 12, I think. And for many years, it didn't really matter what I wrote about it as long as someone would pay me. Somewhere along the way, I sort of accidentally stumbled into the BAM advisor, Buckingham Advisor.
00:09:00
Speaker
world and got hired by them. And once I started writing about investing, I realized this is what my life is meant to be. I'm supposed to be writing about this stuff because it came so naturally and it felt so important to me. So when I went freelance, I continued to write for evidence-based advisors. I offer them a library of materials that they can share or I do custom writing for them. And I try to focus
00:09:27
Speaker
you know unlike I think Robin you do videos and podcasts and other things beyond just the writing I try and focus mostly on the writing because that's really where my heart is at it's what I love doing. As you say I also produce content for evidence-based advisors and for me one of the big challenges you and I face is the fact that what we're writing about and what we're
00:09:50
Speaker
recommending that people do is actually, let's face it, quite dull. Indexing is anything but exciting. But not only that, it's also counterintuitive, isn't it? It goes against what most people think they know about investing.
00:10:06
Speaker
Well, you know, it's been so long since I've learned about it. It's hard for me to even think back to it seeming complicated, because once you do kind of get it, it's like everything clicks into place. And you go, oh, so this is how I'm supposed to be investing.
00:10:23
Speaker
I do remember when I first met Larry Suedrall and the folks at Buckingham and knew nothing about the strategy. I distinctly remember my first impression hearing them start to talk about what is it some sort of pyramid scheme?
Global Acceptance of Evidence-Based Investing
00:10:38
Speaker
You know, because it was just so different, so different from what I'd been exposed to up until then. So yeah, there is that hurdle to get over understanding it. Now, I'm sure there's no shortage of work for you in the United States at the moment. The shift there away from active management towards low-cost indexing has been really quite amazing. It's happening less quickly here in the UK and elsewhere, but it's definitely happening. Evidence-based investing is going global.
00:11:07
Speaker
Absolutely. In fact, the past year or two or three, my business has begun to expand outside of the US, into Canada, the UK. Yesterday evening, I spoke with a fellow in Hong Kong, so that was really exciting.
00:11:22
Speaker
And so what I'm seeing when I talk to other people in other countries is how spoiled we are here in the U.S., because we are seeing the movement begin to really pick up some momentum and where everyone's already heard of passive and we don't necessarily need to explain what indexing is to the general public. And yet in other countries, especially like the fellow in Hong Kong was saying, these are foreign concepts, no pun intended.
00:11:50
Speaker
It's exciting to see it spreading like a big virus take over the world.
Conclusion and Acknowledgments
00:11:56
Speaker
Wendy, as ever, it's been a pleasure talking to you. See you in New York. Yeah, definitely. We'll have a toast to evidence-based investing.
00:12:05
Speaker
Wendy Cook there. And that's it for this week. Thank you to Wendy and to our sponsor Regis Media, connecting advisors with clients. You can find out more about Regis Media at RegisMedia.com. But thanks most of all to you for listening. Until next time, goodbye.