Competence Trumps Style

Abstract

The Editor's Corner is a regular feature of the Financial Analysts Journal. It reflects the views of Rodney N. Sullivan, CFA, and does not represent the official views of the FAJ or CFA Institute. Competence Trumps Style Two types of intelligent active investors reside in the investment community. Typically labeled fundamental and quantitative, these two styles inform decisions with a sound rationale grounded in precedent and solid theory. As such, they both foster market efficiency and sustainability. From time to time, however, these two camps appear to present ideas that drive markets toward inefficiency and turbulent outcomes. Witness the finger-pointing at one style or the other as the primary culprit behind tumultuous market events over the past decade. But a deeper look reveals that such events are driven not by investment style but rather by a failure to embrace the qualities of intelligent investing. Here, we further see that intelligent investing is a matter of character and competence, not of style. Such qualities trump investment style. Successful fundamental and quantitative investors are alpha hunters steeped in investment first principles—informed theory and historical insight. They are constantly on the prowl for unique information and perspective on markets and companies. When applied thoughtfully, their hunting skills help complete markets by constantly pushing toward fair and reasonable prices. Improved market efficiency follows directly from solid recommendations based on plausible and sound information. Sometimes, however, the investment hunt is joined by pseudopurveyors of one of the two investment styles. These less astute visitors often show a stubborn disregard for sound investment practice by making decisions that lack both historical precedent and keen insight into the future. Destructive fat-tailed events are the inevitable outcome.