The Pursuit of Truth

Investing: A Science or An Art?

dantealighieri
Publish date: Sat, 29 Feb 2020, 09:45 PM
dantealighieri
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This blog is a journey to understanding the game of money. Accompany me as we journey through every aspect of investing in the pursuit of truth. At the end of the journey, I hope we would all be a little more enlightened and a little wiser than we were before. Life is after all a perpetual pursuit of truths and self discovery. The ideas presented here are solely an expression of my own beliefs. Good luck to all my fellow investors.
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Investing has been and will continue to be one of if not the most profitable game in the world. Which is why many of us will never stop trying to improve our skills in this endeavour. However, in order to win the prize and do it consistently, one has to first master the game, and money comes to those who win. For hundreds of years people from all backgrounds have tried all kinds of methods to predict asset prices. From fundamental analysis, technical analysis, business sense, complex quantitative statistical measures and even feng shui. Yet the never-ending debate  goes on for which is the best method out there. Which also begs the question: Is investing an art or a science?
 
If investing is a science, then doing the same thing should guarantee the same results. Just as heating water to 100 degrees celcius would make it boil every single time. But evidently, that is not the case in the financial markets, where past does not necessarily predict the future and complex mathematical formulas often turn out to be no better than a flip of a coin in predicting price movements. 
Take for example technical analysis; a quantitative method of predicting price movements through a study of trends and averages. Surely, something as mathematically inclined as this should be a science. Perhaps not. If we look at support and resistance, most investors would know the trick is to buy at the support level and sell at the resistance level. So if the market collectively does so, the price will be well supported at the support level due to the huge amount of buying, and fail to move up at the resistance level due to the huge amount of selling. Thus making the expectations become real. So could it just be a self-fulfilling prophecy?
 
How about fundamental analysis and business sense? Surely it is an art form which can only be gained from years of knowledge and experience in the business world. However armed with some accounting and financial knowledge, one can easily calculate how much a company is worth by using certain measures and financial ratios made famous by value investors such as Warren Buffett, Joel Greenblatt, etc. So is it really an art if investors can learn it just by reading a book? Of course for every method there is a set of assumptions to follow to make it work. Call it pros and cons if you will. Using technical analysis, you require discipline to cut losses when the indicator signals it. Using value investing, you require a lot of patience and holding power. Just as there are many schools of thought in areas of life like philosophy or martial arts, there is not one perfect method to make money in the markets. 
 
That is why it is safe to say, investing is both an art and a science. In fact, it is more a sport than anything else. An intellectual sport, a game of chance and also skill. And just like poker or football or boxing, an experienced investor has to know when to attack and when to defend, when to bet big and when to pass. The more experienced one is, the more skillful he will become and the better his judgement. Not only that, one's decision making not only relies on his knowledge and experience, but also his instincts and his ability to remain calm and rational. And just like boxing, it's not about how many punches we throw, or how hard we can hit. It's about making the punches count, throwing the right punches at the right moments. 
 
As George Soros says, "It's not whether you're right or wrong, but how much money you make when you're right and how much you lose when you're wrong."
 
-dantealighieri
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