If you want to come to Evidence-Based Investing West, the clock’s ticking. The event is just eight weeks away.
One of the speakers you’ll be missing if you decide against it is Bob Seawright. When, in September 2014, The Wall Street Journal published a list of fifteen “smart people for investors to follow,” Bob was on it with the likes of Warren Buffett, Howard Marks and William Bernstein.
Based in San Diego, Bob is the Chief Investment and Information Officer for the investment advisory firm and broker-dealer Madison Avenue Securities. His blog, Above the Market, is one of my personal favourites.
In this interview, Bob explains his approach to investing, and why, despite being strong advocates of passive investing, his firm tends to include at least an element of active management in clients’ portfolios. He also talks about his blog and gives a useful tip to other advisers who are thinking of starting a blog of their own.
How did you get into evidence-based investing, and how do you define it?
I hope I have always espoused evidence-based investing. Of course it is only relatively recently that it has been described that way. In the US, I think it was inspired by evidence-based medicine. My wife is a school teacher and the same kind of paradigm applies to the work that she does, and it’s now been extended to a variety of fields. The idea is a simple one — whatever you’re going to do, make sure you have an evidence-based reason for doing it. The corollary to it is that you should always be prepared to amend what you do if and when the evidence demands it. It’s a theoretical idea that almost everybody buys, but it isn’t always practised. In fact it’s often not.
Why do you think that is?
It’s partly because the evidence is difficult to interpret. The tagline on my site is, “Information is cheap, but meaning is expensive”. Evidence can be very difficult at times; the data can seem to cut in different ways and different directions. Evidence-based investing is sometimes not accepted because it doesn’t fit with the way things have always been done. Some advisers don’t think it’s as profitable or as marketable. Often they say they’re following where the evidence leads but it’s hard to make a case that they are following it.
Evidence-based investing is growing fast in popularity — and especially in the US, isn’t it?
Yes, the good news is that it’s used more and more. The bad news is that it’s still nowhere near enough. Look at the money flowing into index investing, factor investing and quantitative investing. All of those approaches are trying to follow the evidence, and all of those strategies are seeing significant money flowing into them from older approaches to investing. It’s hard to make traditional active management work in today’s environment. While it’s easy enough to disprove the idea that markets are efficient, it’s still really difficult to beat the market. That’s the dichotomy we face. Sometimes the argument is put starkly in terms of active and passive. I would not put it that way, partly because every investor is an active investor one way or another. Nobody invests in the world market as a whole — partly because I don’t know any good way to do it. Everyone is making asset allocation decisions, based on perceived risks, their goals and personal preferences.
You and your colleagues at Madison Avenue Securities often include some active funds in clients’ portfolios. What are your feelings on striking the right balance?
First I should say that if I’m an evidence-based investor my feelings shouldn’t matter! I generally favour a combination of active and passive, depending on your definition. Why do I do that? Well, there are two different types of evidence. Yes, there’s the market evidence, but there is also the evidence on how people manage their portfolios. This is partly what I’m going to be talking about at EBI West. The evidence shows that people mess up in a pretty consistent ways, I think you need to make some portfolio decisions which are arguably less efficient in the portfolio context, to make it easier for clients to stick with them. I think we should sometimes compromise from a portfolio standpoint.
What does that mean in practice? A degree of market timing, presumably?
I would be anxious not to use the phrase market timing. It has a bad reputation for very good reason. There’s not a lot of data to support it. Even among those who do it very well — and that list is shockingly small — there is some question as to how good they are and how much it’s down to luck. But I favour some kind of tactical overlay that allows for what I would call a pressure relief valve can help clients to manage difficult times well. Lots of academic finance wants to call risk “standard deviation”. But the reality is there isn’t a person in the world who has a problem with volatility when it’s to the upside; the problem exists when the volatility is down. That’s why I favour a systematic and limited tactical overlay.
What one piece of advice would you give to investors?
The bottom line is that everybody, if they want to be successful, needs to save more. We spend a ton of time focusing on the best investment strategies, but by far the most effective way to achieve success is to save more. You can make lots of bad portfolio choices, but if you’re saving enough you’re probably going to be OK. Then on the other hand, you can make it perfect investment choices, if such a thing exists, but if you’re not saving enough you’re still going to be hosed.
Tell me about your blog, Above the Market. How did that start?
I started the blog five-and-a-half years ago now as a commitment to myself, to make sure that I was going to be accountable for what I had decided. My view was that if I put it out there publicly, I would have to deal with it when I was wrong. And we are all wrong, and far more often than we are prepared to admit. Writing a cohesive and coherent argument is the best way that I know to sort out my thinking. I have a large following now, so I don’t feel I need to post a lot. My interests have naturally gravitated towards long-form content, and that’s how I have got the most response. I am not as incisive as many, and I’m certainly not as funny as people like Josh Brown. Short hits don’t work for me because it’s not where my strengths lie. But people appreciate the effort and research that goes into my posts, so at least for the foreseeable future, that’s what I’m going to continue doing.
Is there a tip you can give to people thinking of starting a blog, or who perhaps whose blogs are struggling to gain traction?
Keep at it! The investment blogosphere, roughly speaking, is a meritocracy, I’m certain there are lots of really good blogs that haven’t been discovered yet. There have also been some terrific blogs which have appeared for a while and then disappeared. I get that people’s lives change, and the amount of time they have available changes. But, to someone who thinks they have something to say, I would suggest they just keep at it.
Want to hear Bob Seawright speak at EBI West? Book your place here.