Value Investing - an Art, Science or Craft

Three stages of my investing journey, three different opinions.

Early Years - Skills

Early on in my career, it was definitely a science. All the education received on each individual asset class seemed detailed and complex, at times overwhelming. However, with time, education paid a dividend and I started to see the data and information connecting. There are many different accounting measures available. For example, the simple price-to-earnings (P/E) ratio. The P/E ratio compares the stock’s current price (P) to its earnings per share (E). Earnings could be interpreted as historical earnings, projected earnings, average earnings or adjusted earnings. What would you use? When would you use it and why? could a higher-than-normal P/E ratio still show value?

The point is, that everything had to be modelled, every ratio had to have a meaning, and overly complex technicals had to give away a directional bias. I tended to make many unjustified assumptions. I also found there was an obsession to prove my pedigree, meaning I gravitated towards complexity. I would sometimes use superficial inputs that in the end weren't needed for the investment decision. These were the early lessons for a young ambitious investor. Although the results were reasonable, I soon learnt there was a lot of ‘doing’ and a lot less ‘thinking’ into the ‘real world’ ramifications of the narratives I was basing my flawed assumptions on. One of the most admired physicists of a generation Richard P. Feynman encapsulated this type of thinking in the aftermath of the 'Space Shuttle Challenger Disaster'. The failure in the O-rings sealing a joint on the right rocket booster could have been avoided.

It soon became evident that number crunching or modelling ideas alone was not enough to find an edge in investing. ‘Science’ is when we find correlations by deliberate effort. The ‘Art’ is when we uncover correlations through experience, and it creates an intuition that some see as the most valuable asset when faced with extreme market events, not all mathematical models or theories are tested in extreme scenarios, and accounting ratios that you thought were important aren't so important anymore, they merely become the investors compass. I think the saying goes, ‘Reality is undefeated’  but so is truth. Finding truth in investing takes intellectual honesty, and over the years quality investing knowledge gets tattooed into the brain, and the knowledge that had to be unlearnt along the way becomes one of the biggest assets.

Building Momentum - Nurturing the Talent

I truly believe talent is built, it’s not bestowed by the gods. As my experience grew, I built momentum in what worked and what style of investing didn’t. Moreover, I understood what type of investing suited my personality, which was a liberating moment when it all started to come together. This is where my opinion of investing turned more into an art form than it did a science. I built a natural intuition; I was able to control the psychology of committing to a directional bias. I was able to control, and at times manipulate fear, greed, and the regret of missed opportunities. I started to build financial awareness into a 'talent' by understanding the behavioural psychology of investing and the participants in the market. Talent is built over time with discipline and sheer hard work, and there are a lot of failures (lessons) along the way. This is unique to every investor, it’s an expression of your own values, thoughts and processes that are backed up by information, data and real capital. 

I re-iterate again, that this process is a very subjective experience, and the individual who is willing to remove their ego and mentally face the truths of their biases will find a strong foundation in their investing journey. So what makes it an art? What is the growth story behind the valuation? Are there any growth factors that could affect its future valuation? These are all personal opinions you decipher from the facts you analyse. This process is an art, anything forward-looking normally is, otherwise, millions of investors around the world would have already figured out the investing puzzle. These are the skills that nurture the talent part of the investor, and it takes time and patience to apply these lessons to real-world capital.

Understanding both Strengths and Limitations – Professional Investor

With almost two decades of experience, I found myself combining both the art and science of investing to really capture an edge in generating returns. At this point, it becomes a craft. You start to understand that it’s something you have built over time and it's very much a reiterative process whilst evolving with the markets and the needs of the specific investor. This patient process does not stop till the day you leave the markets. The iconic martial artist Bruce Lee captured this thinking best.

Knowing what to analyse and when to analyse it comes with time and experience. It’s a dynamic process within a well-defined framework, with the inputs such as data and information being different every time you run simulations. One becomes accustomed to the market nuances/macro events and you start to understand your strengths and limitations with data and information when searching for high-conviction investment opportunities. What style of investing suits your personality? What type of investing increases the probability of success? What asset classes deliver the best returns on risk? These are just a few questions that you find answers to over time. You embrace disciplined capital allocation, and you realise that human temperament plays a huge role in long-term success. Capital preservation and long-term returns rely on a stable psychology.

When it all clicks, this doesn’t mean you stop learning or growing, it just means you have built a craft that you can keep scaling and perfecting month after month. It entails lifelong learning for a reason. There is a sense of humility that comes with this, the more you know, the more you realise you don't know. My view is that you must always be the student of investing and not the CEO, it's here that we keep learning and growing for decades.

Final Thoughts

If I were to look at investing today, I’d say it’s a craft without any doubt. Market analysis and valuations mean that you never stop learning and growing the knowledge pool. It takes a lot of patience, discipline, emotional control, and mundane processes to create long-term success. Craftsmanship is defined as ‘the ability and willingness to work hard and practice a highly skilled craft every day and to do the same thing repeatedly'. This is the only way an investor can become successful, but it takes a lot of commitment and some 'skin in the game' to sustain the intensity. You must love investing because it can be like watching grass grow, and in a world of instant gratification, this game isn't for everyone.

To become the best footballer, rugby player, guitarist, or a pianist requires the exact same dedication to a craft to be able to perform at the highest level. The best footballer practices the same kick thousands of times a month. A top guitarist is said to practice the same chords and riffs 10 hours a day. At the highest level, it’s knowing how to perform in different settings and environments but delivering the same results when it matters, in investing it’s the same, not only about knowing when to execute but when not to enter a position and walking away from it, regardless if it turns good. If it doesn't fit your risk profile or align with your philosophy, feel no shame in walking away from it. Own the process, and own the accountability for it.

Investing as an 'art' puts the idea of talent before skill, and seeing it as a 'science' puts skill before talent. With the advent of modern-day technology and data, there are enough resources to engineer high-conviction learnings into actionable outputs. This sees the finance world bringing artistry and science closer than ever before, helping fine-tune a craft that is learnt by doing and not just analysing, technology is still only an enabler. The more you do it, the better you get, but don’t be fooled, it takes time to learn the fundamentals and nuances, don’t be a 'busy fool' learning the art and science without learning the real-world application of it all.

I don't think this debate will ever go away, everyone has their own opinion, and this is the way it should be. When you allocate capital to the markets you are choosing to 'live and die by your sword'. Taking accountability and ownership of it.

All of this is highly important when building thick skin in a game that can be fickle. Building scar tissue from your mistakes and failures is a part of the investment journey. This journey makes you a better investor and more importantly, a better human, which means a lot when it comes to being a responsible steward of capital. Your mind stretches and evolves to such an extent that it can never be the same again. I just hope this hunger to keep learning and growing never disappears, if it does, I know it's time to leave the markets for good.