Although there are many ways to classify investment strategies, I would suggest that they can largely be placed in two broad groups: systems-based strategies and individual idea-based strategies.
The broad group of individual idea-based strategies can be easily identified by just that- individual ideas. The manager of such a strategy may be able to wax long about the most seemingly obscure minutia which serves to provide rationale for each of the given investment themes. It is hard not to be impressed with the depth of knowledge displayed during such orations. However, the success of such strategies will always hinge on the ability of the manager to translate perceived market insight into out-sized returns.
Compare this to a systems-based investment strategy (based on a deep value factor or a relative strength factor, for example). This approach proposes to view systems in a holistic manner. Consistent with systems philosophy, systems thinking concerns an understanding of a system by examining the linkages and interactions between the elements that compose the entirety of the system. Evolutionary or dynamic systems-based investment strategies are understood as open, complex systems, but with the capacity to evolve over time.
The more I interact with investors, the more I see that they naturally gravitate to either one investment approach or the other. Characteristics of those who gravitate to systems-based investment approaches generally are as follows:
- They are skeptical of investment gurus. They have been burned by just enough perceived experts to be skeptical of a good-sounding story.
- They desire a degree of consistency in their approach to investing. While the financial markets always have an element of the unpredictable, that doesn’t mean that one can’t adhere to a logical framework to deal with that uncertainty.
- They are generally motivated to act based on a “weight-of-the-evidence-approach.” In other words, they want to know that a given systems-based approach has been thoroughly tested and provides compelling evidence of being effective over time.
- They approach investing with a degree of humility. They can become comfortable with the valuable things that they do know while accepting the things that they can’t control.
