Robin Powell is an award-winning journalist and campaigner for positive change in global investing, advocating better investor education, and greater transparency.
Listen now and learn:
- What evidence-based investing is all about
- The importance of developing a financial plan prior to choosing investments
- The differences in the adoption of evidence-based investing outside the U.S.
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Show Notes
Robin Powell is an award-winning journalist and campaigner for positive change in global investing, advocating better investor education, and greater transparency.
For most of his career in mainstream journalism, Robin worked in broadcast news and current affairs. Today, he runs The Evidence-Based Investor, a website dedicated to telling the truth about investing. He also edits Advisor 2.0, a blog that explores the changes taking place within the financial advice profession.
He is also the writer and presenter of many highly-acclaimed online documentaries about investing, among others the titles Index Funds: The 12-Step Recovery Program for Active Investors and Investing: The Evidence.
Here are my notes from the conversation.
What is Evidence-Based Investing? (2:10)
Robin was a jack-of-all-trades journalist for many years, mainly in television, but it wasn’t until he left mainstream media to set up his own production company that he got interested in finance.
In 2011, he was making a documentary for a wealth management firm in the U.K. that wanted help explaining the benefits of low-cost index investing to their very wealthy clientele.
In doing research for the project, Robin interviewed some key people in the asset management industry and academia, including Jack Bogle, David Booth, and William Sharpe. He was blown away that there was all of this evidence out there about how people should be investing and yet, there is an entire industry trying to get people to do the very opposite of what the evidence says they should be doing.
When he talks about “evidence-based investing,” Robin is talking about investing based on data-driven evidence that is shown to work over time.
You would think most investing is evidence-based investing, but surprisingly a lot of investment decisions are based on opinions and hunches instead of on data and evidence.
Robin identifies three elements of good evidence-based investing:
- Academic and peer-reviewed
- Time-tested
- Statistically robust
It’s easy to take for granted the idea that evidence is data and not stories.
There is a lot of conflict on Wall Street. People can sound brilliant while “pointing you in the right direction” to a strategy in a way that uses numbers.
But numbers are not always actual data. Sometimes they’re stories.
That makes it difficult for many people to delineate what is good evidence versus what is just a good story.
Storytelling is how human beings have communicated with each other since the dawn of time. It’s how we express opinions and come to conclusions about things. They are extremely powerful.
Robin suggests that journalism is responsible for a lot of the misapprehensions and misunderstandings about how investing actually works. To attract advertisers, journalists need to sell their newspapers, magazines, online subscriptions, etc. As a result, they need to tell compelling stories. You can’t sell an investment magazine saying “you should buy index funds and invest for the long run” every week.
Robin notes that we’re all suckers for stories, not just investors. It’s fund managers, advisors, consultants…truly everyone.
The Importance of Planning (11:30)
Good advice doesn’t change that much in the investment realm, but Robin points out that it’s actually the more fundamental need of having a plan that is more important than the investing piece.
He notes that the old adage, “you fail to plan, and you plan to fail” is really relevant here.
Our time on Earth is relatively short. Robin references Four Thousand Weeks by Oliver Burkeman.
When you realize how little time you have, you then begin to realize the importance of thinking about:
- What are my values?
- What are my goals?
- What do I want to achieve with the rest of my life?
- Who do I want to spend that time with?
In my opinion, so much attention is given to investing that we forget investing is just the vehicle to meet your goals.
I always tell people that building a portfolio without doing the planning work would be like walking into the doctor’s office and immediately being handed a prescription before you even said a word about your current health condition.
Once you go through the process of financial planning, then you can match it to an investment strategy.
We are starting to see the financial advice profession move in that direction, towards planning and not just providing solutions. Financial advice is becoming more about really getting to know the client and working out what the issues are.
Evidence-Based Investing Outside the U.S. (16:10)
The U.S. is far ahead in terms of the adoption of evidence-based strategies like low-cost, passive investing.
Robin points out that it took many years for index funds, which were introduced in the 1970s, to prove their worth. And even today, there are many advisors that recommend expensive, opinion-based, actively managed strategies.
While the U.K. is behind the U.S. in terms of overall utilization, the pace of adoption is slightly quicker, particularly in recent years.
One of the largest shifts from active to index strategies came recently when famous fund manager Neil Woodford (once considered to be the U.K. version of Warren Buffett) had his fund blow up, which led to fraudulent activity being uncovered.
Robin also notes that Australia and the Netherlands have been on the trend, but otherwise the global investment landscape is dominated by big banks.
This is surprising to me, but possibly because most of the international firms I interact with are part of a group started by Plancorp’s founder: Global Association of Independent Advisors (GAIA).
The Challenges of Active Management (24:10)
Aside from the hardest part of active management (predicting the future, which nobody can actually do), the other systematic obstacle to successfully outperforming the market is that fund managers work in the asset-gathering business and not the asset-management business.
When a fund performs well, the sales team markets the past performance and money flows in. As the fund size grows, it can be hard to establish worthwhile positions without owning too much of an asset. In the equity world, this can mean a fund manager inadvertently moving the price.
It’s also common to see fund companies launch new funds for that manager to oversee and tout the track record of his or her successful fund, but naturally, someone will be distracted if they are overseeing ten funds rather than one.
These things were on my mind as I asked Robin about a series he produced a few years ago titled, Index Funds: The 12-Step Recovery Program for Active Investors.
While he beautifully covers the basics, I also liked the way active funds were portrayed as being addicted to the excitement that can come from winning or losing. It’s one thing to carve out, say, 5% of your portfolio to get your excitement fix, but it’s important to leave the core of your portfolio alone in a low-cost, diversified approach.
The other points Robin highlights in our conversation go hand-in-hand:
Don’t worry about the ups and downs of the stock market and the importance of good behavior. Being aware that markets are going to lose money, sometimes a lot of money, on the way to earning a decent return can help you be mentally prepared when things look bleak.
Humans are hard-wired to make poor investment decisions, so in a sense, the best thing you can do is to make as few decisions as possible.
Resources:
- The Evidence-Based Investor
- Advisor 2.0
- Index Funds: The 12-Step Recovery Program for Active Investors
- Investing: The Evidence
- Four Thousand Weeks by Oliver Burkeman
- Global Association of Independent Advisors (GAIA)
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Long-term investing made simple. Most people enter the markets without understanding how to grow their wealth over the long term or clearly hit their financial goals. The Long Term Investor shows you how to proactively minimize taxes, hedge against rising inflation, and ride the waves of volatility with confidence.
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