You’ll probably laugh at me… but on Monday, while most people enjoyed a day off from work, I got engrossed in a book about value investing through a “systematic” lens.
Systematic investing is often misunderstood.
By whatever name — quantitative, algorithmic, non-discretionary or rules-based — the idea of systematic investing sometimes conjures images of “black box” computer programs driven only by electrical impulses… instead of fundamentally robust investment philosophies.
But that’s a misnomer. Computers, databases and statistically sound algorithms can only refine the discovery and implementation of a fundamentally sound investment strategy. At the end of the day, computer algorithms or not, you still need a rock-solid investment strategy.
Case in point is the book I was reading…
Basically, the author was using time-honored value investing strategies – those preached and practiced by none other than Warren Buffett and Benjamin Graham – with systematic, rules-based implementation.
To use a war analogy, value investing was the strategy, while a mechanical rules-based system was the tactic. Taken together, the approach showed its ability to outperform passive index investing over the course of many decades and through various market conditions (i.e. bull markets and bear markets alike).
The point is, it wasn’t some esoteric and complex algorithm that allowed for market-beating returns… it was a fundamentally sound investment strategy: “value.”
The “systematic” implementation only contributed additional, icing-on-the-cake type of benefits, namely efficiency of data processing and mechanisms that prevent emotions-driven decision-making.