We use a systematic process for investment because we think that’s the best way to go. Our systematic process also happens to be adaptive because we think adaptation to the current market environment is also an important consideration. (If you don’t adapt you die.) Our decision to use a systematic process is grounded in evidence that, over time, systematic processes tend to win out over inconsistent human decision making. (See here, for example.)
The latest instance of this was an interesting article on Quartz about the coming wave of full-service coffee machines that may have the potential to replace baristas. Consider, for example, what this particular quotation says about the power of a systematic process:
In 2012, Julian Baggini, a British philosophy writer and coffee aficionado, wondered why dozens of Europe’s Michelin-starred restaurants were serving guests coffee that came out of vacuum-sealed plastic capsules manufactured by Nespresso. So he conducted a taste test on a small group of experts. A barista using the best, freshly-roasted beans went head to head with a Nespresso capsule coffee brewing machine. It’s the tale of John Henry all over again, only now it was a question of skill and grace rather than brute strength.
As the chefs at countless restaurants could have predicted, the Nespresso beat the barista.
Suffice it to say that most manufacturing nowadays is done by machine because it is usually faster, less expensive, and more accurate than a human. Perhaps you will miss terribly your nose-ringed, pink-haired, tatooed barista, but then again, maybe not so much.
Systematic investing has its problems—sometimes the adaptation seems too slow or too fast. Sometimes your process is just out of favor. But like a manufacturing process, a systematic investment process holds the promise of consistency and potential improvement as technology and new techniques are incorporated over time. While it may seem less romantic than the lone stock picker, systematic investment could well be the wave of the future.
HT to Abnormal Returns