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The importance of an investment philosophy

Aaron Oh
Aaron Oh • 4 min read
The importance of an investment philosophy
AGGREGATE ASSET MANAGEMENT SINGAPORE (May 28): “The educated differ from the uneducated as much as the living differ from the dead” — Aristotle. Investors seek the holy grail to riches — the strategies that successful investors use. However, it i
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AGGREGATE ASSET MANAGEMENT
SINGAPORE (May 28): “The educated differ from the uneducated as much as the living differ from the dead” — Aristotle. Investors seek the holy grail to riches — the strategies that successful investors use. However, it is my personal opinion that most of the strategies are a manifestation of a philosophy. Therefore, I see great and renewed importance in philosophy and, in particular, investment philosophy. In this article, I will be looking at two questions — why philosophy and how to create one.

The word “philosophy” comes from the Greek word “philosophia”; “philo” meaning love and “sophia” meaning wisdom. To answer “why philosophy”, I will be offering two perspectives, one from a pure philosophical standpoint and another from an investment standpoint.

Philosophy enables us to be reasonable. Being reasonable is at the very core of philosophy. It can be taught in the specialisation of logic (argumentation) and epistemology (knowledge). It enables us to form an argument structure, to question and probe one’s inner self. It also satisfies and recognises our limitations of being mere mortals. As Robert Hutchins once said, “It must be remembered that the purpose of education is not to fill the minds of students with facts… It is to teach them to think, if that is possible, and always to think for themselves.” We are students of life, and we should constantly question everything. Philosophy is also a transferable skill. The knowledge acquired is widely applicable across different specialisations and fields, such as investing. It helps us to enhance our critical reasoning, communication as well as ethical reasoning skills. Furthermore, philosophy is all around us, from the quantum world to the cosmos.

Applying it into the world of investments, philosophy is like Polaris, our guiding star. It keeps us pointed in the right direction, amid the chaos and irrationality in the markets. Without an investment philosophy, you run the risk of losing direction when all hell breaks loose. To take and modify a quote from Joel Greenblatt, I will say that “without an investment philosophy, it is like running through a dynamite factory with a burning match. You might survive, but you’re still an idiot”. Investors that had an investment philosophy, and stuck by it, would have prevented their emotions from running amok (for example, Tulip Mania, the dotcom bubble).

I will now try to address “how to create an investment philosophy”. The answer to that is individualistic in nature, but I will attempt to answer it. The Stoic created a division of philosophy that revolved around three elements, namely logic (wisdom), ethics (justice) and physics (self-control). Our investment philosophy should encompass the above virtues as an example. To illustrate further, it should go something like this. First, to use logic in our investments (that is, to understand one’s strengths and weaknesses, to create a system that complements the strengths of the individual). Next, to always maintain the highest level of integrity. Last will be self-control (that is, to avoid the temptation to buy into companies with high valuations, to be able to weather difficult times when the results are embarrassing). An investment philosophy does not have to be eloquent. Most investors keep their investment philosophy short and sweet.

At Aggregate Asset Management, our core philosophy revolves around value. Our investment philosophy can be summed up in one line: Be cheap, be honest, have faith.

In closing, I should also caution the reader that an investment philosophy is not an investment strategy, process or style. An investment philosophy is a guide or navigation tool around one’s strategies, processes and style. It is a way of thinking.

I sincerely hope the reader would have questioned himself and almost everything that is mentioned in this article. “Stay hungry. Stay foolish.” — Steve Jobs.

Aaron Oh is an investment analyst at Aggregate Asset Management. Any enquiries can be directed to [email protected]

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