In this Expert Insight Interview, Julio Cacho & Juan Carlos Herrera discuss science-based investing. Julio Cacho & Juan Carlos Herrera are financial experts and co-founders of Quantor Capital.
This Expert Insight Interview discusses:
What the scientific method is and how it is applied to investing
Differences between traditional investing and science-based investing
Why it is almost impossible to outperform the market
A lot of the investing that people do today is either gut-based, recommendation-based, or based on very little research. That’s why science-based investing sounds like such a promising idea. As you might imagine, science-based investing relies on using the scientific method to make investments.
The scientific method used in investing does not differ from the scientific method used in any other field. It is a methodology based on observing a phenomenon, posing a hypothesis, testing said hypothesis, and finally asking other people to test the same hypothesis to see if they can replicate your results.
To contrast the scientific approach to traditional investing we can use the example of market forecasting. Traditional investors believe that market swings can be predicted with certain skills and research.
The empirical evidence, however, is pretty clear on the notion that market forecasting is a near-impossible task. Nobody has a crystal ball, so according to science-based investing, the market is unpredictable, therefore market forecasting is a futile pursuit.
Outperforming the Market
For most traditional investors, the goal is to outperform the market, but the science-based approach focuses on a set target or goal to be achieved and it is more defined. Outperforming the market is a term used very loosely, and people seem to throw it around without really knowing what it means.
The academic literature is clear on how hard it is to outperform the market over the long haul, based on the simple idea of a zero-sum game by which for each person that outperforms the market, there must be one that underperforms by the same amount. When you add costs to that equation, outperforming the market becomes even more difficult.
John is the Amazon bestselling author of Winning the Battle for Sales: Lessons on Closing Every Deal from the World’s Greatest Military Victories and Social Upheaval: How to Win at Social Selling. A globally acknowledged Sales & Marketing thought leader, speaker, and strategist. He is CSMO at Pipeliner CRM. In his spare time, John is an avid Martial Artist.