Investment Philosophy

Lecturer: Gonçalo Faria

School of Economics and Finance
 Investment Philosophy

“Who wants to be an average investor? We all dream of beating the market and being super
investors, and we spend an inordinate amount of time and resources in this endeavour....In
spite of our best efforts, though, most of us fail in our attempts to be more than average.
Nonetheless, we keep trying, hoping that we can be more like the investing legends -
another Warren Buffet, George Soros, or Peter Lynch...”

(Damodaran, 2012)
 Investment Philosophy

Throughout this course, students will learn about popular investment strategies and,
very important, that to be successful with any investment strategy, we have to start with
an investment philosophy that:

o is consistent at its core

o matches the markets you choose to invest

o matches your client characteristics

 Investment Philosophy

What is an Investment Philosophy?

● It is a coherent way of thinking about markets, how do they work (or not), and types
of biases that we believe consistently underlie investor behaviour

● Relevance: consistency and control. Crucial when exposed to risky assets markets
turbulence
 Investment Philosophy

Main categories of Investment Philosophies (we will study in detail each of them)
o Market timing vs Asset Selection: based on timing overall markets vs finding
individual assets that are mispriced
o Activist versus Passive Investing: invest in one company and try to change the way it
operates to increase value (e.g. private equity) versus invest in one company and wait
for the investment to pay off
o Time horizon
Example: a philosophy based on the assumption that markets overreact to new
information may generate short term strategies
 Investment Philosophy

The number of investment strategies is much higher than investment philosophies.

Examples:

1. Market timers trade on two opposite investment strategies:

o Price momentum, based on assumption that investors are slow to learn from
information
o Contrarians, based on the belief that markets overreact

2. Fundamental investors:
o Value investors, believe market overprice growth
o Growth investors, believe market underprice growth