Thrilling tales and simple truths, the art of wilful ignorance in the world of investing.

The story of Ignaz Semmelweis is both a marvel and a tragedy. His work was a crucial step in forming the modern theory of disease, saving countless lives. However, at the time, his findings barely made a ripple in the medical world. Many lives which could have been saved were condemned by the seemingly voluntary ignorance of his peers.


The Ignaz Semmelweis monument in Budapest

Semmelweis was a Hungarian physician who worked in Vienna’s general hospital in the mid 19th century. In 1846 he took on the task of reducing deaths of mothers after childbirth. This was one of the biggest problems in hospitals at the time. Many women even chose to give birth on the street as the survival rate was higher.


As many as one in ten women died after childbirth at one of the clinics Semmelweis worked. However, in another clinic, operated by midwives instead of doctors, the rate was around 4%.


There were many existing theories for why women died in childbirth. From an imbalance of the ‘four humours’, to the will of God, to certain ‘bad airs’ in the ward. Some asserted it was down to morality of the women, even questioning the circumstances in which they became pregnant.


Semmelweis saw no evidence for any of these theories. He did however recognise that if women in one clinic died at a greater rate than in another, then there must be something to be done.


Having no real idea of where to start, Semmelweis experimented with many factors. From changing the positions of women giving birth to preventing priests from ringing bells in the ward. None had any affect. Finally, he instructed doctors to wash their hands with chlorine solution before delivering a baby. Suddenly the death rates plummeted.

To us, it is obvious that delivering a baby with hands dirty from treating a diseased patient or performing an autopsy is highly dangerous. However, the idea that infection could be transferred from one person to another in this way was truly ground-breaking at the time.

What was Semmelweis’ reward for his findings? Most doctors dismissed him, listening to their emotions over reason. They refused to believe that they could be at fault for the mother’s deaths. Others asserted he needed to come up with a viable explanation before they could accept his results. He struggled to come up with a reason the doctors could accept, and was dismissed from the hospital in Vienna. Unfortunately, the doctors returned to their old ways, and death rates returned to previous levels.

Although Semmeweis had similar success during an unpaid position at a small Budapest hospital, he was still not taken seriously by medical professionals or universities. Not accepting his theory that ‘cadaverous particles’ could be carried from one body to another on doctor’s hands, they stuck to their previous theories, often using bloodletting to try and save the women.  

Frustrated by the deaf ears he found everywhere he went, Semmelweis became increasingly obsessive, erratic and depressed. In 1865 he was taken into an asylum and confined to a straitjacket in a darkened cell. Two weeks later, he died from an infected wound he sustained in a beating from guards. It was quite likely he was capable of curing this ailment himself if given the chance.

Times have changed, but humans have not

For many empiricists and medical professionals, Semmelweis is a hero. His unwavering decision to favour observable facts over the theories, narratives and egos of his peers didn’t just save lives in his day. Ultimately, he helped to inspire the rigorous model for cohort testing we still use for drugs and medical treatments today.

Semmelweis’ story revels an important point about the way us humans process and react to new information. The phrase “the Semmelweis reflex” is used to describe how we tend to reject or explain away new evidence or knowledge that doesn’t reflect our established norms or beliefs.

Fortunately, in the medical and other scientific realms, we now have better institutions and methodologies in place. Although imperfect, they attempt to iron out the biases which we as individual humans fall prey to. However, that does not mean these cognitive biases are not as prevalent now as they were in Semmelweis’ day. In other fields, their effect is as strong as ever, investing being just one example.

A story worth a million numbers?

The world of investing is full of active managers, all of which use various methods to try and beat the market. Each one will weave a compelling explanation of the techniques they use which they believe will give them an edge. Some will simply pick companies they believe will do well in the future. Some use complicated algorithms in attempt to time the market, buying low and selling high. Some incorporate a dizzying array of factors into their decisions which they claim will systematically pick the companies with the most potential.

Any self-respecting fund manager has their own theory for how the market works. They will be able to talk about it convincingly and at great length. Yet however complicated, technical or brilliant an explanation sounds, it counts for nothing without the returns to back it up.

The table below shows the number of US active funds which beat their benchmarks in the 20-year period until the end of 2020. As we can see, only 32% funds survived the whole period. Of those that did, 86% were beaten by their index. The numbers are even worse for international and emerging markets. This does not make your chance of picking a successful fund very high. Yet active managers disregard this evidence. Instead, they charge high prices to investors for funding research, analysis and hefty pay checks, even when their strategy is clearly failing.

The percentage of active funds beaten by their benchmarks in different categories

 All US EquityUS Large EquityUS Small Cap EquityInternational EquityEmerging Market Equity
% Beaten86%94%94%91%92%
% Survived32%27%36%31%39%

Many people try to beat the market by investing in themes, sometimes called megatrends. These range from artificial intelligence to the rise of China or, more recently, the 5G ‘boom’. Once again, these have compelling stories behind them. Intuitively, these themes appear to have massive potential and seem like a guaranteed good investment. Without a crystal ball though, it is impossible to judge what the returns will be like in reality.

For instance, if you invested in big tech companies way back in 2009, your investments would have done extremely well. However, if you invested in China, your returns would have been under half what you would get from a simple market tracker. Clean energy, seemingly another no-brainer, posted negative or stagnant returns for well over ten years. These trends were still important and transformative to the world economy, they simply didn’t provide good returns. Would you have been able to predict that back in 2009?

Source: justETF

Defying logic

In 2014, Jeremy Siegel demonstrated in his fifth edition of ‘Stocks for the Long Run’ how compelling stories about the potential of new industries should be treated with caution. To do this, he examined the S&P 500 index, which tracks the US’s largest 500 companies. In the 1950s when the index was created, chemical, automobile, steel and oil companies were dominant. Since then, their share of the market has fallen as new industries and technologies have taken hold.

Despite this, Seigel found that if you continued to hold the 500 companies that were in the index at inception, you would have beaten the market by an average of 1% per year over the next 50 years. Similarly, between 1984 and 2014, the price of companies that got kicked out of the FTSE 100, which tracks the largest 100 companies in the UK, went on to grow an average of 0.9% per year more than the new entrants.

From 1900 to 2015, rail companies declined from 63% of the US market in 1990 to less than 1%. Despite this, rail has outperformed the US market and all other transport sectors, including road and air, over this time period. As for the best performing industry over that time period? You may be surprised to learn that tobacco stocks, despite the stringent regulation and dwindling popularity of their products, still came out on top.

The numbers seem to present strong historical evidence that declining industries have a good chance of beating the market as a whole. Yet how many ‘declining industries’ themed investment products do you think there are? That’s right, zero. Why? Because which investor would choose to miss out on the potential of new transformative industries to buy older more obsolete ones? It simply doesn’t provide a good story. 

The Semmelweis solution

A true empiricist like Semmelweis would approach investing like he approached the problem in hospitals. Ignore the narratives and explanations of their peers, however much sense they seem to make, and simply look at the proven facts. Fortunately for us, there is a minority in the world of finance that do this. Their findings yield some interesting and highly useful results. We exclusively recommend investment solutions that evidence suggests will provide reliable returns over time for our clients.

A large part of our model portfolios we recommend for clients are made up of Dimensional funds. Dimensional is a rare empiricist in the investing world. Since the 1980s Dimensional has worked closely with Nobel prize winning academics who have crunched decades worth of data to find practical ways you can maximise long run investment returns. When it comes to equities, it has identified three main factors which over the long run have historically provided above market returns. Smaller companies, as well as those with high profitability and a low price relative to a company’s underlying value (common features among those in declining industries), have been shown to outperform the market over the long run.

Dimensional also has a ‘story’ that is uses to explain their investment beliefs known as the ‘efficient market hypotheses’. It states that markets are efficient in pricing their stocks. In other words, all of the information you need to establish the value of a stock is contained in its current market price. This is not the same as saying market pricing is perfect, but it is an efficient indicator of value at a point in time. It will of course move when new information comes out.

This theory is well founded, based on evidence and presents a useful and practical model for investing. However, you don’t actually have to buy into this understanding of the markets to take advantage of the factors that have been shown time and time again to benefit investment returns. What is most important is that Dimensional demonstrates through constant empirical observation, testing and good long run returns that their model of investing works for patient investors.

As true empiricists, Dimensional periodically investigate many other factors that could possibly affect returns. They have changed their views and how they implement their strategies as new evidence emerged in the past.

In Conclusion

Investing is a complicated world, and often works in counter-intuitive ways we cannot expect. For this reason, it is very hard, if not impossible to know what the future holds. Much of the investing industry, from products to news, rely on people believing that they can predict the future in some way. It is easy to be dazzled by seemingly ground-breaking explanations or feeling like you might miss out on new opportunities.

Market conditions are constantly changing. Even investors who identify a way to profit from the trends of today may have their fortunes turn tomorrow when market conditions change. Yet sticking to a simple, globally diversified, low-cost strategy with exposure to the factors that matter has been demonstrably shown to give you the best chances of long run returns. It is best to take a leaf out of Semmelweis’ book and look at the cold, hard facts. Anything else is a gamble, and there’s a good chance it won’t pay off.

Risk Warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, platform or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

This article was produced for educational purposes and aimed at UK residents.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.


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