The Science & Art of Investing

Sending a man-made satellite to the sun is far more predictable than investing.  The uncertainty brought about by the behaviour of investors makes investment outcomes imprecise but not necessarily less successful.

 

In May last year I was lucky to visit NASA in Silicon Valley, so I was particularly interested to see the details of its latest mission to the sun. Called the Parker Solar probe, it will take just under seven years to complete 24 orbits of the sun, reaching speeds of 700,000kph. It will need to be able to withstand temperatures more than 1300 degrees Celsius as it goes as close as 6.1 million kilometres from the sun’s surface — and its navigational instruments will use Venus to adjust its course and slow down.

I understand that at the end of the day, it’s all calculations. But it’s pretty impressive how the scientists can plan a venture like this to such precision.

Investing is also full of numbers, so one would think it should be at least as precise.  
Of course it’s not – if it were, everyone would make a fortune. The difference, of course, is significant. Investing is not a science; it’s a combination of science and art. Investing is more economics than physics, and economics is as much art as it is science because there is so much human behaviour in economics. Instruments of economics are never totally predictable – because human behaviour isn’t predictable.

The data is not always helpful
We have access to more information these days than ever but that doesn’t mean that we either understand it or can make sense of it. Sometimes, too much information is the same as no information.

Financial engineers are analysing the data extensively and ‘discovering’ risk factors that go a long way to explain returns. We are definitely more educated around how markets work and the relationship between various factors, but the data can also be manipulated to draw biased conclusions. As the saying goes: “If the data is interrogated hard enough, it will tell you what you want to know.

“A wealth of information creates a poverty of attention”
Even though we have internet search engines like Google, it’s still a struggle to find what you want.

Investment markets are based on the fundamental premise that the market participants care about the price. The ‘Efficient Market Hypothesis’ then argues that markets are considered ‘efficient’ if all available information is ‘in the price’. In other words, all market participants have access to all available information about the security, and they have considered it before determining their view of the price.
I wonder whether for the first time in history, a significant portion of market participants don’t care about the price. There is an unprecedented flow of funds into index funds and neither the investor nor the manager of index funds pays any attention to the price of the securities within the fund.

Intelligence and rationality aren’t necessarily linked…

Sir Isaac Newton, an English mathematician, astronomer, theologian, author and physicist not only identified an investment bubble after making money out of it, but managed to get out of it early enough to secure his profit.

However, after the price kept rising irrationally, he couldn’t help himself and got back in at three times what he had originally paid, only to lose it all and go bankrupt. He summed up his experience with, “I can calculate the movement of stars, but not the madness of men.