In a recent post I made the obvious point that randomness has a very significant impact on investment performance. Of course, we’re all too ready to acknowledge bad luck when things go wrong, but when we succeed we want all the credit. In any event, my friend Cullen Roche also published the post at Pragmatic Capitalism, where it got a comment that I find interesting and deserving of a bit more examination.
An anonymous commenter criticized my “data-driven” approach in light of my emphasis on the importance of randomness.
“As a regular reader of this site I found the article above referencing investing and randomness to be a curious juxtaposition to the self described ‘data driven’ perspective. Informationally a simple railcar loadings graph in the corner of the computer screen will tell much more about economics in comparison to the nebulous links and content above which are mostly sports metaphors loosely associated with statistical probability.”
While the writing is less than clear (and I used examples from sports, not metaphors), the writer seems disgusted that someone committed to being data-driven would recognize the importance of luck. I think the argument is supposed to be that data offers far more than I would allow. The writer seems to think that someone with an alleged commitment to evidence-based investing should expect the evidence to reveal all or nearly all.
As regular readers will recognize, I am in fact committed to evidence-based investing. That requires being data-driven – ideology alone is not enough. Being sold on a story isn’t enough. A good idea isn’t enough. A good investment strategy will be – must be – supported by the data.
But being truly data-driven also requires that we go no further than the data allows. Honoring our limitations is particularly difficult because we so readily “see” more than is really there. As Charlie Munger said to Howard Marks, “none of this is easy, and anybody who thinks it is easy is stupid.” And a key reason investing is so hard is that the data tells us so much less than we’d like it too.
Good investing demands humility. We need to be humble so as to be able to recognize our mistakes and correct our errors. We need to remember that we don’t know everything (or even necessarily all that much). And we need to be able to recognize what and when we just don’t know.