Evidence-Based Investing

You are probably familiar with Evidence-Based Medicine or even Evidence-Based Practices.  However, as an investor, are you familiar with Evidence-Based Investing?  Evidence-Based Investing is the conscientious, explicit and judicious use of current best evidence in making decisions about the care of individual clients and their investment portfolios.  This is a model of investing based not on speculation but on the science of the capital markets; decades of research guide the way.

Evidence-Based Investing delivers the performance of the capital markets and increases returns through state-of-the-art portfolio design and trading.  While the overwhelming majority of investment platforms are based on the myths of stock picking, market timing and track record investing, we base our strategies on what the evidence, driven by the scientific method, leads us to.  Because Evidence-Based Investing is not based on speculation or guesswork, but on tested and proven results, there is a measured certainty that can be expected.

Evidence-Based Investing is not “cookbook” investing.  It is not investing in a vacuum and requires an approach that integrates the best external evidence weighed against personal experience and choice.

The Aubry & Eustice investment philosophy is built upon the following precepts:

• Long-term Market Efficiency.
  Markets throughout the world have a history of rewarding investors for the capital they supply. Companies compete with each other for investment capital, and millions of investors compete with each other to find the most attractive returns. This competition quickly drives prices to fair value, ensuring that no investor can expect greater returns without bearing greater risk.
• Risk and Return are related.
  The evidence is clear and undeniable: returns come from risk. Gain is rarely accomplished without taking a chance; but not all risks carry a reliable reward. Financial Science has shown us which risks are worth taking:
  • Stocks have a higher expected returns than fixed income
  • Small company stocks have higher expected returns than large company stocks
  • Lower-priced “value” stocks have higher expected returns than higher-priced “growth” stocks

The level of return for each investor is unique.  Some investors are more risk-averse, while others seek risk. The level of risk each investor is willing to take is dependent on a wide variety of factors, such as current and future income needs, current economic conditions, or even personal investment experiences in the past. It is important to understand your tolerance for risk to maximize the level of return for your investment portfolio.

• Diversification is essential.
  Diversification is a method of reducing risk by pooling a wide variety of investments within a portfolio. However, to have a successful portfolio, diversification needs to go beyond a cluttered mix of various investments. Portfolios should be spread among various investment vehicles such as equities, fixed-income, cash, etc. Within each asset class, the securities should vary in the level of risk they carry. Investing in only blue chip stocks or government issued treasuries will limit your ability to reduce risk while attempting to increase expected returns. Variety is essential, but it must also be done in a structured manner.

• Global Diversity

  The total market capitalization of all of the companies listed on stock exchanges in the United States is less than 45% of the entire globe.  Many investors add a small portion of international investments to their investment portfolios, but for the vast majority of investors, international investments are greatly under-represented.  Global diversity may seem outside an investors comfort zone because the investor has been told for a long time to invest in what they know.  However, investing with a “home bias” can limit an investors opportunity to dramatically increase returns and, likely, decrease risk over the long-term.

• Structure determines performance.
  Structured management is so named because of the structure of the engineered portfolios. We follow an approach to investing that is built along multiple dimensions of risk and return.  The portfolios hold fast to the principle of diversification, and are meticulously designed to minimize costs and incidence of capital gains tax. Aubry & Eustice utilizes this investment strategy to deliver the highest possible expected returns through portfolio design and trading with the lowest possible volatility and transaction costs.
• Seek to capture the dimensions of meaningful risk factors.
  It is the assertion of Aubry & Eustice that the road to investment success lies in identifying the risks that bear compensation, choosing how much of these risks to take, and then striving to minimize the risks and costs imposed by traditional approaches. Science-based portfolio engineering makes this possible.
• Minimize costs

“Transaction costs represent one of the largest erosions of investment value that investors face. We believe it is often the very largest barrier to superior performance.”  - Wayne H. Wagner, Chairman of Plexus Group.

Aubry & Eustice strongly supports this statement. Research has shown that these hidden costs of investing can erode investment value anywhere between 3 and 8% annually. However, the platform that we use works to keep trading costs well below that.

• No one can accurately, consistently and predictably outperform the markets by actively buying and selling stocks.
  There is no crystal ball. The impressive amounts of historical evidence is strongly against those who still believe it is possibly to consistently grow wealth by picking stocks, timing markets or make decisions based upon a “hot hand.” This is not investing; it is speculating or, more aptly stated, gambling.
  
• Fiduciary Responsibility.
  It is our responsibility, by both government fiat and moral conviction, to make decisions based upon what is in the best interest of our clients.