If you need to cross a river, it's unlikely the bridge below you will collapse.
That's because the engineer has been trained in hundreds of years of best practices. From tension and compression to the latest on when and where to use a beam, arch, truss or suspension for support, she knows what's come before.
Not only that, but the bridge she designs is the result of countless iterations over the centuries. Every design has been improved based on trial and error from the millions of crossings before yours.
Bridge construction is an engineering project, and it's based on physics and best practices. Learn from the past, don't ignore it. It’s black and white: physical laws cannot be violated.
Investing, on the other hand, is something we value because the markets are dynamic. It is more than engineering—investing is, by definition, without guarantees. There are no physical laws. It’s gray: remove uncertainty from the outcome there is no opportunity for return.
But even so, investing is based on best practices and the evidence.
The value investor better have read Graham and Dodd, and more recently Damodaran. The asset allocator should be familiar with Markowitz, Swenson, and Bernstein. The factor investor needs to know William Sharpe, Fama and French, Mark Carhart, and James O'Shaughnessy. And those looking for insight on how humans behave in their interactions with the markets: read Kahneman and Tversky, Thaler, and Ariely.
Depending on the investment strategy you chose to pursue, ignore the work that has come before it if you want to, but learn it first.
For us, this means that our starting point is the global market portfolio (i.e., “the work that has come before) then deliberately shaping how we will differ. This might mean taking more (or less) risk, tilting towards factors of higher expected returns, or incorporating alternative strategies which we anticipate will improve our risk/return trade-off.
Different investment strategies work for different people, but before going down one of these paths, it pays to know the best practices of those who’ve come before.
*This post is inspired by and draws heavily from the article “Best Practices” by Seth Godin on November 22, 2017.