Absolute Truth, and Investing

Owen Lamont, Executive Vice President and Portfolio Manager at Acadian Asset Management, a boutique hedge fund based in Boston, puts it this way:

Human beings are constantly choosing between what is familiar and what is new. Should I turn on my favorite playlist, or try some new music? Should I keep using my current phone, or switch to the latest model? These are not easy decisions. On the one hand, we tend to be conservative and slow to incorporate new information. This is a central element in many theories of behavioral finance. At the same time, Warren Buffett has achieved great success by consistently sticking to a few simple principles, and he hardly seems like someone who is always chasing new music.

The problem gets more complicated when more people are involved in the choice. When we buy a product, we expect yesterday’s product and today’s product to be the same. That is why consumers were outraged when New Coke was launched in 1985. I, too, get angry every time Silicon Valley companies force on us unpleasant updates, clumsy redesigns, and silly rebrandings.

But the world does not stop changing just because we wish it would. We live in a world that changes constantly and unpredictably. According to decision theory, the optimal response in such a world is to update our beliefs and strategies whenever new information arrives.

Let us now turn to systematic investment. Suppose you decide to allocate capital to a systematic equity manager called XYZ after reviewing its track record from 2005 to 2025. You then learn that XYZ has been continuously revising its alpha model over that period, that the 2025 model overlaps only 95% with the 2024 model, and shares a mere 36% with the 2005 model.

How should you react to this information? Do these changes feel like New Coke—an unpleasant and unnecessary intervention? Does it make the entire performance history of XYZ seem meaningless? If Warren Buffett does not change his strategy, why does XYZ keep changing its model? Is XYZ effectively admitting that the 2005 model was terrible?

I believe that reacting this way would be a mistake. Let us start with the track record. It is true that XYZ’s realized performance over the past 20 years was generated by models that are no longer in use, and therefore today’s model does not fully reflect past results. But frankly, XYZ’s performance (a) is heavily influenced by random events, (b) has limited power to predict future returns, and (c) is only one part of the bigger picture you need to understand about XYZ. You should not choose XYZ solely on the basis of historical performance, nor should you rely only on simulations based on the 2025 model.

More fundamentally, when you invest with a systematic manager, you are not investing in a single “model,” but in a specific research team and the research process they run. This process encompasses how they evaluate new signals, monitor existing ones, and analyze market conditions. XYZ’s future performance will be determined by the decisions this team makes through that process, and ultimately, that process is what you are investing in.

Science is the ongoing process of updating our worldview in light of new information. How “stable” an alpha model should be, or how “adaptive” it should be, remains an open question. But one thing is certain: never updating an alpha model cannot be the optimal choice.

The Honda Civic was first released in 1972. If you were buying a Civic today, I would recommend the 2025 model over the 1972 version. Honda has improved the car every year by incorporating new technologies. Of course, there were failed updates, such as the 2012 model, which many people disliked. But if the design had not changed at all since 1972, that would be the worst possible outcome. Compared with today’s cars, a 1970s car breaks down more often and is far less safe.

The Ship of Theseus is an ancient philosophical paradox about identity and persistence over time. If you replace a ship’s parts little by little each year, at what point does it become a completely different ship? Two thousand years ago, Plutarch wrote:

From a practical standpoint, this paradox is meaningless. Given a leaky ship with rotten planks and a well-maintained ship with new, solid planks, which one would you board? I would, of course, choose the latter.

Even if the later ship barely overlaps with the original, that is a strength, not a weakness. Continuous updates are a feature, not a bug. Of course, faster is not always better. Replacing every plank every single year would be costly and bring little benefit.

More generally, in a noisy and uncertain information environment, it is usually optimal to update a model gradually as new evidence accumulates. In theory, the similarity between successive generations of a model should lie somewhere between 0% and 100%, not at either extreme.

There are areas of life where unwavering loyalty and firm resolve are admirable—for example, when rooting for the Boston Red Sox. But my loyalty is to the team, not to the 1978 Red Sox roster. The ’78 team holds a special place in my heart, of course, but in reality roughly 25% of the players change every year.

The Ship of Theseus demands rigorous preventive maintenance, and quantitative investment strategies require loyalty to a disciplined research process.

Love the ship, not the planks. Love not the model itself, but the research process that created it.

Like the Ship of Theseus, if you replace its planks one by one over time, at some point you can’t avoid asking whether it’s still the same ship as the original. Even if you swap out a single plank according to the blueprint, you’re bound to wonder whether the new plank was produced from exactly the same kind of wood, using exactly the same process, as the one used at the beginning. Even if the tree species is identical, its characteristics can differ subtly depending on the environment in which it grew, and even if the manufacturing process is nominally the same, the equipment used in that process may have aged or been replaced.

The human body is no different. At every moment, the cells that make us up die off and new cells take their place. We have a blueprint called DNA, but as time passes (and we age), the new cells that are created develop small differences from the existing ones. This is because DNA itself is damaged by external factors such as ultraviolet light and cigarette smoke, as well as by oxidants and alkaline compounds generated in the cell’s own metabolic processes. Roughly every seven years or so, most of the cells in our body are said to be replaced by new ones (brain cells do not regenerate).

Earth’s gravity pulls us with an acceleration of 9.807 m/s², but it has been observed that the speed of gravity itself is equal to the speed of light. Even if the sun, which pulls Earth with gravity and keeps it in orbit, were to disappear right now, Earth would not leave the sun’s orbit until 8 minutes and 20 seconds later, and only then would we realize that the sun had vanished. If gravity has a speed, what on earth does that even mean?

Attempts to explain gravity date back to before the Common Era, but in the 17th century the Italian mathematician Isaac Newton formulated the law of universal gravitation, describing how all objects with mass exert an attractive force on one another and proving this phenomenon mathematically. As a result, up to the present day, physics—especially at the introductory level—has conventionally taught gravity as a “force” acting between bodies.

The complication arose in the 20th century, when the genius physicist Albert Einstein introduced the general theory of relativity. According to Einstein’s general relativity, space and time are connected (spacetime), and therefore space and time influence each other. The theory states that matter tells spacetime how much it should bend, and the curved spacetime in turn tells matter in which direction and at what speed it should move. This phenomenon has since been observed and verified multiple times by later scientists. We don’t usually use gravity as a term to describe a part of spacetime; we casually call it a “force.” But gravity is also an aspect of spacetime—more precisely, it is a measure of how much spacetime is curved.

The famous ancient Greek philosopher Aristotle accepted and propagated the theory of four elements—the claim by the earlier Greek philosopher Empedocles that the universe is composed of four elements: fire, earth, air, and water—and this view was largely accepted without major challenge up until the 17th century.

In antiquity, because the depth of each discipline was shallower than it is today, we might think of philosophers as doubling as mathematicians, scientists, or physicists. In reality, though, all academic disciplines originated from philosophy. The word “philosophy” itself essentially means “the study and discernment of what is right and wrong in the world.” To study and discern what is right and wrong, you must (1) formulate a hypothesis and (2) test it. Inevitably, in order to explain the most fundamental phenomena, philosophers had to hypothesize about what the basic constituents of matter are and how they relate to one another. That is why, when someone completes a doctoral degree at a modern university, we call them a “Doctor of Philosophy,” or PhD for short. Anyone who pursues scholarship is, in the end, doing philosophy.

Investing, too, can be done by adhering to a few consistent principles over a long period, like Warren Buffett, or by updating your models as new information comes in, like Lamont’s systematic investing.

If there is a single absolute truth, it is that the world we observe is an “approximation” that reflects “reality” to some degree—and that by tomorrow, our existing laws may explain only part of that approximation.