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As we saw last week, they're both practicing "Cargo Cult Science," a term coined by physicist Richard Feynman. Cargo Cult Science may be defined as any endeavor that imitates the scientific process, but its substance falls woefully short of established scientific principles. Some call it "pseudoscience."
Last week we toured Wall Street to observe some Cargo Cult Scientists in action. Such "expert" analysts, buttressed by their lofty credentials, used technical phrases to give the impression that their research methods were rigorous. But their words rang hollow, failing to live up to even the most rudimentary criteria for scholarly activity.
The burning question remains, then: Is the Foolish Four scientific? Or are we all merely Cult Scientists?
To attempt to answer this question, we'll need to come up with a working definition of science. This subject is actually a lot more complex than it may seem, and way outside the scope of this article. (As part of my search, I've found words like "epistemology" and "instrumentalism"; believe me, we don't want to go there.) One of the best working definitions of science I've come across is from the Academic Press Dictionary of Science, which defines science as:
Richard Feynman has defined science as "the result of the discovery that is worthwhile, rechecking by new direct experience, and not necessarily trusting the [human] race experience from the past." One critical aspect of science, according to Feynman, is the ability to reach reusable conclusions.
Can the Foolish Four studies satisfy these definitions of science?
I'm getting in a little deep here for a general interest article on investing, so let's bring things a bit more down to earth. Let's consider three potentially scientific statements:
The first of these statements, about the dropped ball, will be true in virtually every instance. How do we know? The statement is scientifically verifiable, based on a rigorously tested physical principle, Newton's law of gravity. Such a physical law (modified slightly by Einstein) has been empirically tested many times over, subjected to countless experiments and perturbations, and found invariably useful for formulating reusable conclusions. It's the epitome of good science. The ball will fall.
What about the doctor who treats a patient with strep throat, an infection known to be exquisitely responsive to penicillin? The predictive accuracy of a statement confirming the patient's response is much lower than the accuracy of our bowling ball statement. We can treat 100 strep patients with penicillin, and the vast majority will be cured. However, no matter how carefully we study the response of the bacteria to penicillin, a very small minority of patients might not improve. Maybe the patient won't be able to swallow the medicine. Maybe the patient will have an allergic reaction to the penicillin that could even be fatal.
So even though medical doctors like to think of themselves as scientists, the type of science they practice is very diluted compared to that practiced by chemists or physicists. Their predictive accuracy is much lower. Scientists in the biological fields can perform all sorts of randomized, controlled clinical trials that can help reach reusable conclusions, but they can't control for hundreds or thousands of extrinsic factors. The system is too complex. Our patient likely will be cured, but we can't be certain.
How about the Foolish Four prediction? We have lots and lots of data for almost 40 years showing that certain Dow stocks, chosen for high-yield and low-price characteristics, have easily outperformed the S&P 500, to a statistically significant degree. Other investigations with slightly different groups of stocks, including those of James O'Shaughnessy and Beating the S&P, have reached similar conclusions. So, is the basis of Foolish Four investing scientific?
If we stick with our original definition of science ("the systematic observation of natural events and conditions in order to discover facts about them and to formulate laws and principles based on these facts"), I'd have to say yes. We've made systematic observations (about events probably not so "natural") to generate the hypothesis that our Foolish Four stocks will continue to beat the S&P 500 over the long run. The Foolish Four probably will outperform over the next 10 years.
But we need to recognize the limitations to our Foolish Four "scientific" investigations. We have not discovered the law of gravity. We haven't even conducted prospective, randomized clinical trials. Our form of science contains even more uncontrollable factors than the study of medicine. We've made some attempts to reach reusable conclusions, but our degree of certainty for our hypothesis is relatively low.
Given this uncertainty, is the Foolish Four just another form of Cargo Cult Science? Are we just going through the motions of science, bluffing our way?
I'd say no. I think the key difference is that scrupulous Fools realize the limitations of our investigations. Any good scientific report will include the limitations of the study and reasons why the conclusions might be incorrect. Cargo Cult Scientists pretend they've got the answers and report conclusions in ways that are not defensible by their data.
Foolish Four "scientists" can say that there's a good chance such a mechanical strategy will outperform in the future, but we don't know for sure. We recognize we're dealing with a very complex system, that our observations are based on retrospective data review, and that we can't possibly control for all the factors.
The difference between Cargo Cult Science and the best work in such "soft" social sciences is the presence of intellectual honesty. Rather than dismissing all such works as "unscientific" (and therefore worthless), we should keep in mind that our conclusions will always be tentative due to the inherently high limitations of our studies.
We'll conclude with one of my favorite Richard Feynman quotes:
We must continue to doubt. Unfortunately, this necessary doubt often makes for poor newspaper copy and sound bites. The Cargo Cult Scientists, the Elaine Garzarellis, grab the headlines. But, hopefully, we unsure Fools will ever-so-quietly be building real wealth.
Beating the S&P
Bank One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %> +4.2%
PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> +22.2%
Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> -4.5%
Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> +13.0%
Fannie Mae <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %> -2.4%
Beating the S&P +6.5%
Standard & Poor's 500 Index +0.0%
Compound Annual Growth Rate from 1-2-87:
Beating the S&P +24.0%
S&P 500 +17.3%
$10,000 invested on 1-2-87 now equals:
Beating the S&P $178,000
S&P 500 $85,500
1. The systematic observation of natural events and conditions in order to discover facts about them and to formulate laws and principles based on these facts. 2. The organized body of knowledge that is derived from such observations and that can be verified or tested by further investigation.
"The scientist has a lot of experience with ignorance and doubt and uncertainty, and this experience is of very great importance, I think. When a scientist doesn't know an answer to a problem, he is ignorant. When he has a hunch as to what the result is, he is uncertain. And when he is pretty darn sure of what the result is going to be, he is in some doubt. We have found it of paramount importance that in order to progress we must recognize the ignorance and leave room for doubt. Scientific knowledge is a body of statements of varying degrees of certainty -- some most unsure, some nearly sure, none absolutely certain."
year-to-date returns
(as of 06-13-00):