Making Investment Theories More Pragmatic: How Context Clarity Helps

“It is not a case of choosing stocks that, to the best of one’s judgement, are really the most attractive, nor even  those that average opinion really think the most attractive. We have now reached a third degree where we devote our intelligence to anticipating what average opinion expects average opinion to be.”

John Maynard Keynes, 1936

“In the short run, the Market is a voting machine, but in the long run it is a weighing machine.”

Warren Buffett,  1993

 “Context is what appears when you hold your attention long enough. The longer you hold it, the more  context appears.”

Jenny Odell, artist and writer, 2022

‘Context’ for a More Integrated Investment Theory

When thinking about investment theory and its relevance to investing retirement savings, we would do well to take Jenny Odell’s advice seriously: do some clear thinking first about what you want to achieve. What is the context for your quest? For example:

• Is it about understanding how the Capital Asset Pricing Model and Arbitrage Pricing Theory can help you set realistic investment return targets?
• Is it about understanding how the Efficient Markets Hypothesis impacts the potential value of corporate security analysis?
• Is it about setting time-frames for investment decision-making and for results evaluation? For example, what are the implications of the clear ‘long-termism’ views set out above by wise investors like John Maynard Keynes and Warren Buffett? 

Why pose these context questions about investment theory in this Letter? Because prior recent Letters have been addressing components of investment theory without explicitly setting out the full context why we were doing so. The purpose of this Letter is to explicitly raise the ‘context’ question to ensure that the investment theories we have been calling on are pragmatically useful.