Over at Abnormal Returns is an interview that Tadas Viskanta had with Dr. Wesley Gray of Turnkey Analyst about his book, Quantitative Value. It makes a great case for systematic investing (i.e. investing based on rules, not intuition) and why removing emotion from the investing process is really the best way to success in the investment world. However, he goes a step farther by differentiating between investing based on logic and based on empirical data. The argument focuses on value investing, but I think the case presented is applicable to all styles of investment.
Dr. Gray displays his wit in making his case, but it’s a strong case. The bottom line:
After studying data from the post-Graham era, we have come to the same conclusion as Graham: cheapness is everything; quality is a nice-to-have. For example, the risk-adjusted returns on the higher-priced, but very high quality firms (i.e., Buffett firms) are much worse on a risk-adjusted basis than the returns on a basket of the cheapest firms that are of extreme low quality (i.e., Graham cigar butts). In the end, if you aren’t exclusively digging in the bargain bin, you’re missing out on potential outperformance.
[The] psychological difficulty with buying value stocks is that the names make you want to hang yourself from the rafters. It is not fun owning Blackberry when Android and the iPhone are taking over the world. Anyone want to join me in buying a bunch of defense-related stocks in the face of a budget crisis and potential sequester? Oh boy, let’s all get on that bandwagon of pain. Yuck…but as I always tell my investment team, “Yucks turn into bucks.”
As always, I encourage you to read it all, and if you are interested, buy his book. Also mentioned is the father of value investing, Bejamin Graham. An interesting video about him has been circulating, put together by the Heilbrunn Center for Graham and Dodd Investing, Columbia Business School: