What makes an investment philosophy?

What constitutes a philosophy? It’s a philosophical question in itself, but I ask because it’s a term that’s thrown around liberally these days.

It’s a bit like ‘genius’ – Albert Einstein was a genius, but now it seems Ed Sheeran is too. Muhammad Ali was a ‘legend’, but so is your mate Chris when he scores in a division 3B cup quarter final.

So, when is a philosophy really a philosophy? Football managers have them, brands have them, your boss might have one too, but aren’t they just a handful of ideas, sound bites and received wisdom?

When you’re investing and particularly when you trust a firm to manage your wealth for you, the distinction really matters.

Beliefs vs. hunches

In the Oxford dictionary a ‘philosophy’ is “a set of beliefs or an attitude to life that guides someone’s behaviour”. Good investing rests on beliefs gained from experience and research over a long period of time, not hunches, not impulses.

An investment philosophy is a distillation of the experience and expertise a wealth manager has amassed. They might encapsulate it in a single phrase, but beneath that one-liner will be a host of key principles, their own “set of beliefs and attitude to life”.

The markets – partner or opponent?

A good place to start is whether they feel the markets are something to be employed or outwitted. The debate has raged for many years and it will rage on, but different philosophies rest on whether you can, or cannot, predict market movements with any degree of success.

I’ve yet to see any evidence that long term investors should try to beat the market returns. Because, I’ve yet to see evidence that it can be done consistently.

Costs – how much is too much?

Costs are another key point of divergence. An active manager will feel the costs racked up by frequent trading (impeccably timed of course) are more than recouped by the performance achieved. Other managers take the opposite view, believing the biggest part played by costs is their habit of eating into returns, so they should be kept as low as possible.

It’s a question of fuel efficiency, whether it’s better to conserve fuel on the long, straight road to your destination, or to burn more fuel, gambling on winding shortcuts to get there more quickly.

Being fuel efficient is boring. Boring when it comes to investing is an excellent strategy.

Benchmarking – who’s counting?

Some managers will sell benchmark-beating performance, while others won’t talk about benchmarks at all. Some will have charts of how they’ve performed against an index (and each other), while others will tell you it doesn’t matter how anybody else is doing, or what the front pages say, as long as you reach your own life goals.

When Chris (our goalscorer from above) is telling you about the amazing returns he has had from his “portfolio”, ignore it and bring the conversation back to his “legendary” goal.

The only benchmark you need is this:

Will my investment strategy help me lead the life I want to live?

Risk and reward

Without risk there’s no investment, what you’re doing is ‘saving’. But even then, saving isn’t without risk.

The biggest risk though is inflation. Will an All-Ireland final ticket cost the same when you retire as it does now? No, it will not. So, you must invest to protect your money from inflation. This can be a tough one for investors to get comfortable with. But it is so important to understand this concept.

Behaviours and biases

Your approach to risk raises another philosophical question, how well do you know yourself? We’re all biased, whether we realise it or not. Our complex evolution has given us all sorts of quirks that help us to get through everyday life but wreak havoc with our investments.

So, in a sense, understanding a firm’s philosophy begins with understanding what matters most to them – you or your performance. Sooner or later it’s not just about buying into a philosophy, it’s about finding one that meshes with what matters to you.

So, what makes a philosophy?

To answer the question – when is a philosophy a philosophy – the answer is when it underpins every move that a manager makes. When they learn, amass and stick to a body of core beliefs in the way they manage your money, when those beliefs are demonstrable and repeatable, this can reliably be called a philosophy.

I’m not a philosopher, but if I was, I’d advocate finding yourself a firm with an investment philosophy that speaks to you, one that lets you sleep easy at night. Find a manager who listens to what you want to achieve, believes in building a plan and sticking to it and reminds you that the only important benchmark, is you.

If you would like to read more about the Metis Ireland investment philosophy, check out https://metisireland.ie/services/investment-philosophy/

Carl Widger
Managing Director, Metis Ireland

Twitter: @CarlWidger
Email: cwidger@metisireland.ie