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TV Expert Interviews / Motivational / Jul 25, 2021 / Posted by Juan Carlos Herrera / 237 

Science-Based Method of Investing (video)


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

Scientific Method

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.

Market Forecasting

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.

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About Author

Juan Carlos Herrera is co-founder and managing principal at Quantor Capital. He is also the founder of Quantum Leap Capital Management.

