Evidence Based Investing

Evidence Based Investing: Cut the Cord and Don’t Watch the “News”

Thoughts on Evidence Based Investing

What if the AHA changes the hypertension guidelines and recommends CNBC in all physician’s waiting rooms?

Overripe coffee and commentary… that should really help business! Our business, not the stock market’s.

Of course, I’m being absurd—but read and understand the point. CNBC is not good for health as it falsely elevates blood pressure.

“News” about the stock market has physiological effects. That’s the point. Stock market news does not provide you pertinent information, it sells eyeballs advertising. Guessing why the stock market did what it did today is a fool’s errand. Yet it sells.

I suggest physicians ignore not only CNBC but news of the stock market entirely. That’s right, cut the cord! Turn it off!

Evidence-Based Investing

Watching stock market news doesn’t make you a better investor. In fact, it probably makes you worse.

A sham story from a few years back concluded that investors who had the best investment results were dead. And those who forgot that they had an account did second best!

Although not evidence-based investing, it likely is not far from the truth. The more you watch CNBC, the more likely you are to actively trade. The more you trade, statistically, the more you lose!

In fact, best practice is likely to set your asset allocation once a year and then forget you have an account. Lose your password! Cut the cord! Stop watching CNBC and watch your GERD and pre-hypertension resolve.

Let’s get back to evidence-based investing here for a second. What does that actually mean? In medicine, we understand best practices and the evidence behind what we do.

I ask just about every resident I see what evidence supports duration of antibiotics for a specified infection. For instance: do you treat an upper respiratory tract infection with 3 or 5 days of azithromycin?

What does the evidence say about that?  I bet if you studied it, 1.5gms one time works equally as well against a cold if you give it over 3 or 5 days.

The level of confidence in that evidence is equivalent to what you have in the investing literature. If you ask a bad question, you get a bad answer.

Ask a Bad Question…

And so it is with evidence based investing. Do you think there are double blind placebo studies on stock market returns? Not so much. Investing is still Freud on the couch with the cigar. Maybe starting on to understand some psychopathology. But understanding normal human psychology—not even close.

Who is supplying the evidence? Is it the Wall Street investment industrial complex who wants you to believe how complicated investing is, that you need their services or products to succeed? When a drug rep comes to your office, what do you think about the evidence that they provide?

Evidence based investing simply is studying the behaviors that matter. What behaviors are important to focus on for long term returns?

Let’s look at behaviors that are more important than CNBC.

Evidence-Based Investing and Behaviors that Matter

Don’t focus on market returns.

You can’t control them any more than you can control the weather or politics. Moreover, they don’t really matter!

Overtime, if 150 years of American history informs us of anything, its that the stock market reflects the American economy. Invest for the long term and ignore the static and noise.

Know your timeline.

If you are young, time is your best asset due to compounding interest. Time in the market beats timing the market. If you are not young, understand when you have won the game and de-risk.

Know the devil inside you.

Don’t sell low. Understand that there will be a recession every 5-7 years. The market will crash; plan now for how you will behave during the worst of times.

Know your costs.

In your retirement plan, what is the expense ratio of the funds you have selected? There is no better predictor of future results than the costs you pay now. Moreover, if you have a guy or gal advising you, do you know how they are paid? Really? Have them write down all the expenses you have been charged in the last year. Trust me, they are not doing this for free. Equally important, do they have your best interests at heart? A great majority of “advisors” out there are legally required to put their employers’ best interests above yours. Is that how you practice medicine? Fiduciary advice reduces conflicts of interest. Advice-Only Planning is even better!

Finally, know something about risk.

Once you have decided to invest, your asset allocation is the most important decision you have to make. This is more than what allows you to sleep at night. What are your goals and expectations? How much risk do you need to take and how much can you stomach without selling low? If you understand risk, you will feel no need to watch CNBC.

So, do you have CNBC playing in your waiting room? Get an aquarium. You will learn more about the stock market from watching the fish.

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6 Comments

  1. I think it is hard for intelligent physicians to just ignore the market.
    I know it is for me. I keep thinking that if I learn more and tinker a bit I can optimize my investments and boost my return.
    In the process, I capture even less of the market return. My tinkering is wrapped in emotions and then covered in intellectual rationalizations.
    So I buy more after a rising market and am fearful after a crash. The opposite of rational. My account would do better if I didn’t exist.

  2. I wrote a couple articles on the Galton board and also on Bayesian analysis. My financial adviser actually sent me a Galton board as a present. My investing goal is to make financial decisions such that my ball ends up above the mean on the Galton board. That’s where Thomas Bayes comes in. You can’t change the distribution but you can change your path by making choices that bias toward above the mean. CNBC and hot tips in the Dr lounge will assuredly bias things negatively. If you want to get rich just listen to Cramer and do the opposite.

  3. I generally agree with what you say here about disregarding daily stock market moves with one important exception: tax loss harvesting. If there is a significant drop it can be very advantageous to do this particularly now that commissions for ETFs and mutual funds are basically zero. Who doesn’t love reducing their taxes! After a 20 year+ military career I have given Uncle Sam enough!

    Thanks for what you do!

  4. Great article and spot on. It took many years for me to learn to disregard the constant market updates, but it is the best thing we can all do for our portfolios. Btw, we drove across Montana this week on our first visit. Man, what a beautiful state you have! We are doing a slow cross country trip from Washington to Virginia with a few stops in between. We spent four days in Montana and visited Yellowstone. Amazing beauty! We will be back!

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