Jim O’Shaughnessy: Never Override Your Investing Model

In this interview with the Jack and Justin at The Excess Returns Podcast, Jim O’Shaughnessy discusses a number of timeless investing lessons and the importance of never overriding your investing model. Here’s an excerpt from the interview:

You will never see us make a change because of a recent market event right.

We had a consultant come in after the financial crisis, who worked for a big bank that no longer exists, but anyway he covered quants and systematic investors specifically. He told us that during the great financial crisis more than 60% of quants overrode their models. To me that is a death sentence if you are a quant and you emotionally override your model you have negated all of your previous track record right. Because it’s proving that you too are emotional just like the guys you’re saying are doing it the wrong way.

So our process is highly regimented. It has lots of research always going on. You very rarely see any really exciting change right I mean that is a big difference. Moving from single value factors to composites and moving from single momentum factors to composites, that was big, and I think obviously it’s demonstrated that’s been a great change but look.

I always joke beginner’s mind, you’ve got to approach everything with beginner’s mind. The worst thing that can happen to you is for you to think I know everything. That’s the death of your brain in my opinion and you know that’s dogma and we see it in politics today. But we see it in a lot of other places too. We see investment dogmas, we see dogma everywhere, and dogma’s bad because what it means to me at least is you think you found the truth and you’re not gonna search anymore.

Believe me you haven’t found the truth. You’re getting closer to the truth hopefully but you haven’t found it. You got to keep searching and that’s why you’ll never see us emotional. In fact that’s one of the things I’m most proud of right.

So I started managing money for others in the mid 90’s and you know every kind of crisis we faced and I’ve never overridden a model ever and I believed because if I did that that’s game over. No one could trust me ever again and so you know. So I guess if I have a dogma it is that’s the one rule you can’t violate right. Other than that always keep your eye open for new ways of thinking about things, of measuring things, of all those things and just keep learning.

You can watch the entire interview here: