Decoding the science and art of investing

A question that is often asked is whether investing is a science or an art. I believe it is a combination of both. The aspect of science in investment is fairly obvious. You need information and data and you need to know how to analyse it.

Many years back, both these were difficult to find. Investing related courses were few and far in between and information was not readily available or distributed in a timely manner. This provided some advantage to professional managers who had the requisite education and more access to information than retail investors.

In the last couple of decades, all this has undergo a sea change. Today, there are domestic and international courses specific to investing that are available to anyone who wants to pursue either a career or manage her/his own investments.

Information availability and simultaneous dissemination has been driven by the many regulatory changes done by the Securities & Exchange Board of India (SEBI). Now there is a host of information regarding listed companies that is available immediately after its release, on the website of the exchanges.

Till some years back, most financial data was used mainly to do quantitative analysis on a set of companies with a view to identify probable investment candidates. Further, data related to the historical price performance of shares was traditionally used to do technical analysis, where price charts were studied to identify patterns and predict future price movements based on these patterns.

However, in the recent past, there has been significant development related to using data to, both fundamental and technical, to create proprietary models which are back tested for results and then deployed in the markets real time.  This has given birth to a different type of trading called High Frequency Trading (HFT), where the computer does the entire work based on models. A further advancement to this is the increasing use of Artificial Intelligence where the computer itself analyses its mistakes, makes appropriate changes and deploys the resultant amended model.

From the above you can see that science has done great advances in the field of investment and now reached a stage that it can be solely deployed for investing and making money. However, in my opinion, long-term investing continues to remain an art.

First and foremost, markets do not always move as predicted. If that was the case, then surely, only computers would be working in the markets. However, market movements involve emotions of the investors which cannot be captured in data. These emotions range from Greed to Fear and are dominant towards the top and bottom of a market cycles respectively. Investors who can understand these emotions and have a long-term outlook tend to make much superior returns than the others.

Let me give an analogy between investing and driving a car. You need to learn the rules and pass the drivers exam, but driving is much more than that. The skill has to be learnt and it entirely depends upon what your objective is as to how much you hone your skills. Some people don’t know driving and are fearful of learning. They will employ either an external car (Taxi) or own the car but employ a driver. Some people have learnt driving and are proficient enough to go from one place to another. Others take driving as a career and spend hours each day honing their skills to become a better race driver.

Similarly, some people are scared of investing into equities so they buy equity related products, some want to own the investments but not manage them, they employ Portfolio Managers and Investment Advisors, some others invest directly and are happy with the results that they get and finally there are people who make investing a career and work as research analysts or fund managers.

Another fact that proves investing is an art is that there is no perfection here. Even the race driver continues to practice each day. Additionally, just as in driving, there may be different styles and temperaments, but as long as you reach your destination, all is fine.

So, first understand your objective and then move towards developing the relevant skill set. If you do not rush things that lead to accidents on the way, it is perfectly fine to go slow while trying to meet your objectives, till you become an expert at the art of investing.