Picking a Formula for Investing
What about factors like the management of the company? Don't they matter as much as rate of return and variance?
I don't suppose those are the only two things that matter, but they are the two most important things. It's hard to tell when a company is fundamentally strong, but when it is, its stock price tends to appreciate fairly fast and steadily. When you are feeding information into a computer about different stocks, you don't have room to feed personal inclinations in. You've got to feed in numbers.
Why does this work well?
What you want is to earn money. The simplest thing would be to pick the most rapidly appreciating portfolio, but that tends to appreciate rather erratically. Most investors don't like that, and they want it to go up more steadily. So this is a quite successful way of building portfolios.
So why don't all portfolio managers use this formula?
An awful lot of people do do it this way. And it's well-known people who do it this way, such as TIAA-CREF. They were one of the first ones to adapt scientific portfolio selection methods. There are plenty of people who don't buy that school of thought, but they don't beat the people who do, and they tend to charge more.
So where do you put your money?
I personally am a big fan of the index funds. If I were a younger man and/or if I had known in 1960 what would happen [with the stock market], I would have invested all I had in Ed Thorpe, a mathematician who figured how to beat 21 in casinos. He used the same idea to figure out how to beat the market and ran a hedge fund. His ideas have been out there a long time and have been copied. Now it is harder to earn those big returns, because these methods have been out there awhile. So it is harder to find windows of opportunities. Fortune's Formula is still the best thing around, but those supernormal returns are not likely to be there again.
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