The pendulum is doing what pendulums do: swing back. (Yeah, I was surprised too, but it turns out the plural is NOT “pendula,” unless it’s used as an adjective in Latin. And no, I can’t imagine how use it as an adjective, but then again I don’t read Latin.) While the pendulum is for the moment pointing toward common sense instead of algorithms and experts, we should celebrate a couple of headlines.
In “Why Data Will Never Replace Thinking,” Justin Fox notes that Nate Silver and Samuel Arbesman – two of the sharper minds decoding data in the press these days – are keen to balance out the “big data” noise by reminding us that choosing what data to look at and how to look at it are hardly simple or objective matters. Fox makes the point that human judgment remains an essential part of the observe-hypothesize-test cycle whether we realize it or not, so perhaps best to realize it. Of course, we spend a lot of time on this at Array (we even have hypotheses about hypotheses), and we embrace having good old-fashioned human beings at the heart in the process as an advantage – particularly in situations where finding the local optimum in a known space might no longer be sufficient to succeed.
An even better headline may be Yahoo! Finance’s “Individual Investors Are Beating Pros at Their Own Game,” stemming from an interview in which Josh Brown of TheReformedBroker.com observed a trend: “asset allocation being done by the individual, and even by the financial advisor, in a way that sidesteps the mythology of this stock picker or that stock picker.” According to Brown, last month “investors put $18 billion into US stock ETFs. That’s a net number. $12 billion of that went right into the SPY [the SPDR S&P 500 ETF]. They’re not interested in stock picking, they’re not interested in active management; however, they recognize they cannot let this market run away without them…. The public is reacting, but they’re not interested in having their assets shepherded by the quote-unquote ‘smart money.’”
While the article doesn’t fully merit the headline (which we are nevertheless printing out, enlarging and putting up in the office), Brown is pointing to something big: SPY benefits from a combination of anxiety about retirement and distrust of equity experts. In an environment of fear and loathing, SPY wins simply by default. The good news is things are headed in the right direction: the index will beat most of the stock pickers people are running from. The bad news (aside from the waste and bubbles that inevitably accompany bumping 500 stocks by 10 bps in a month just because they happen to be in an index) is that this new ETF religion will become yet another obstacle to helping people meet their goals.
We know it isn’t as simple as humans vs. machines or traders vs. algorithms. Investing is a case where having the “best of both” is not just a nice theory but can actually be a reality: equity selection based a broad set of objective inputs , customized for the investor and performed at a low cost can generate index-beating returns. We know because we’re doing it. And no matter which direction that pendulum is pointing, it’s always time for better returns.
P.S. If you reached the end of this post and wondered why I haven’t more directly referenced Up with People, it’s because I’m still recovering from the 1982 Super Bowl halftime “extravaganza.” On the other hand, if you the title of this post didn’t bring up any memories, enjoy the show.