“Investing is more art than science,” American investor Howard S. Marks is supposed to have said. It’s an intriguing statement, but what exactly does it mean?
Typically, we associate the concept of art with creativity, imagination, playfulness, and intuition, among other things. On the contrary, the word science immediately evokes beakers and lab coats and cold rationality.
Beginner investors tend to believe that investing very much belongs in the latter category. After all, there are plenty of numbers, theories, and models involved. And investment banks and hedge funds aren’t exactly populated by poets, are they?
But what if the two concepts are not quite so far apart as they first appear? After all, there is a great deal of hard-won technique involved in art. Likewise, many great scientists have spoken of the importance of applying imaginative solutions to their research. Indeed, the writer Vladimir Nabokov once wittily advised his students to keep in mind “the passion of the scientist and the precision of the artist.”
The best investors have a particular gift for mixing passion with precision. If you study the life and philosophy of Berkshire Hathaway CEO Warren Buffett — arguably the most successful investor of all time — you might be surprised by how ‘home-spun’ his wisdom can sometimes sound, and how little he emphasizes the more scientific approaches to investing.
In a 1989 letter to shareholders, Buffett famously said that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” What Buffett was suggesting here was that some of the most important aspects of a business don’t necessarily show up on its balance sheet. The values a company professes, the popularity of its leaders, the happiness and commitment of its employees: these are the sorts of things that a rigidly numerical approach would fail to address.
Of course, it would be reckless to make all of your investing decisions based purely on psychological or social grounds, but it would be equally ill-advised to ignore them completely.
Peter Lynch, the author of ‘One Up On Wall Street’, went a step further than Buffett and credited his training in the humanities for providing the key insights that informed his decisions as an investor.
“As I look back on it now,” Lynch wrote, “it’s obvious that studying history and philosophy was much better preparation for the stock market than, say, studying statistics. Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.”
To take one more example, the personal finance blogger Morgan Housel has gone even more in-depth than either Buffett or Lynch and attempted to break down exactly which aspects of investing fall under the heading of art and which fall under the heading of science:
“Building a valuation model is a science. Calibrating it to reflect the psychology of uncertainty is an art.
“Gathering information is a science. Filtering out noise is an art.
“Net present value is a science. Identifying the trust and passion of a CEO is an art.
“Measuring what worked in the past is a science. Understanding why things are different now is an art.”
In the final analysis, it’s fair to say that a certain amount of the decisions you will make as an investor should be informed purely by the financials of a given company. If a business has consistently delivered poor quarterly earnings reports, for instance, then you might be well-advised not to be taken in by the charisma of its CEO.
It is always wise, however, to remember that the stock market is still an institution built by human beings, with all of their emotions and irrationalities built into it. Keeping this fact in mind throughout your investing journey will put you ahead of those who think precision beats passion every time.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.
Contributing Writer at MyWallSt
Jamie is a contributing writer for MyWallSt.