McGraw-Hill

Life on the Leading Edge 15
find beautiful? What do their spouses look like? What are their
tastes in art?
The stock market is a beauty contest with of tens thousands of
contestants and tens of millions of judges, so succeeding is a bit
more complicated than handicapping the next Miss America pageant.
The task is beyond the capacity of the human mind alone. It re-
. quires computers and statistical techniques that can organize and
make sense of vast amounts of disparate information. It requires insights
into psychology as well as fundamentals. It requires a means
of evaluating these insights so that their usefulness is maximized. It
requires the adaptability to stay on the leading edge of new developments
and the creativity to hone that edge with new ideas and
new research.
As H. L. Mencken allegedly said, ”For every complex problem,
there’s a simple solution, and it’s almost always wrong.” is Investin a
complex problem, and it demands a complex solution. Arriving at that
solution requires painstaking effort, but is ultimately rewarding.
Paradoxically, if the market were simpler, and investing were
easier, the rewards would be smaller, because everyone would buy
low and sell high. It is the market’s very complexity that offers the
opportunity to outperform-to those intrepid investors able to
combine the breadth of inquiry and depth of analysis needed to disentangle
and make sense of that complexity.
THE BOOK
For those readers unfamiliar with our articles, this book provides an
introduction to the concepts that form the foundation of our approach
to equity investing. For those of you who may have read
these articles as they first appeared in print, the book provides an
overall context within which the contributions of each article to our
overall philosophy are clarified. In either case, we hope it will provide
an enjoyable and valuable addition to your investment lib
The book groups the articles into three main sections. The
cles in Part 1 focus primarily on security analysis in a complex m
ket. The first two articles define complexity and discuss the
importance of disentangling and purifying return-predictor relationships.
The next three take a closer look at of some the anomalies
that we have found to be exploitable, including departures from