Handbook of Finance: Investment Management and Financial Management

Chapter 7. Investment Beliefs

DONALD M. RAYMOND, PhD, CFA

Senior Vice President, Public Market Investments, Canada Pension Plan Investment Board

Abstract: Investment beliefs comprise all that we know or think we know about the ways in which asset returns are generated. We discuss the epistemological reasons why there is little we know with a high degree of confidence in the field of finance. As a result, in order to make investment decisions, we have to rely on beliefs. By their very nature, investment beliefs cannot be proven but have varying degrees of theoretical and empirical support. They are implicit in virtually every investment decision, but it is uncommon for them to be made explicit. We discuss the importance that governing and managing fiduciaries develop a shared and living set of investment beliefs that guide strategy development and investment decision making throughout their organizations.

Keywords: investment beliefs, investment theory, investment governance, investment strategy

An investment belief is a theory relating to the returngenerating processes of assets; the degree of logical justification and empirical evidence supporting the theory allows us to gauge how much confidence we ought to place in it. Beliefs need to be updated as new theories are developed and as the range of empirical evidence expands and must remain subject to ongoing critical debate within the investment organization. This is especially true of the beliefs underlying active strategies, the success ...