That’s not to say there isn’t a way to be active and successful at it. Being systematic is a big part of it, and many people [active managers] have not managed money in a systematic way historically.
Inside ETFs: Would you include back-tested data as a good source for evaluating and understanding performance?
Sibears: I think that backtests are meaningful for setting expectations. So if someone shows me a backtest that’s never underperformed, I wouldn’t trust that. For me, the value of a backtest is to understand when it might do well and when it might do poorly, and in what type of environment. But generally, you want to see strategies that have success on a nonbacktested basis.
Summing up, before I get to the point of looking at a backtest, I should have conviction about whether I want exposure to that type of strategy to begin with. I need to believe that momentum investing, for example, adds value, and why it adds value. I can’t get that conviction because of a backtest.
Inside ETFs: What’s the one practical take away from your speech?
Sibears: The most practical takeaway is to identify ways of managing money that are grounded to data.
Momentum, value, low volatility. Start with a very-well-grounded approach to investing and have the ability to stick to it. Realize that you’re going to underperform sometimes, but those strategies only work over the long run and you need to be committed to owning it.
Warren Buffett said that if you’re not willing to own a stock for 10 years, then you shouldn’t own it for 10 minutes. It’s the same with these strategies.
Inside ETFs: Is there anything else you would want to tell investors before your keynote speech at the Inside Smart Beta conference?
Sibears: One big argument that people present to fight momentum as a valuable tool is that people tend to chase returns, and we know from the data that individual investors don’t tend to achieve that as they go in and out too much.
But because people behave that way, they aren’t as disciplined and systematic as the average momentum investor, so when they chase returns in that haphazard way, they’re creating an opportunity that we can take advantage of in a systematic way. What may seem as evidence against momentum is actually why momentum works in the first place.