Most people has a myth, complicated math play a key role to invest successful.
Buffett’s plain words
Buffett said: “If calculus or algebra were required to be a great investor, I’d have to go back to delivering newspapers.”
Below was from WSJ, May 2, 2009 reported.
Mr. Buffett on complex calculations used to value purchases: “If you need to use a computer or a calculator to make the calculation, you shouldn’t buy it.”
Buffett on the use of higher-order math in finance: “The more symbols they could work into their writing the more they were revered.”
Mr. Buffett adds: “If you stand up in front of a business class and say a bird in the hand is worth two in the bush, you won’t get tenure…. Higher mathematics my be dangerous and lead you down pathways that are better left untrod.”
Peter Lynch’s preach
Peter Lynch wrote “Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.” Peter Lynch stated “If stockpicking could be quantified, you could rent time on the nearest Cray computer and make a fortune. But it doesn’t work that way. All the math you need in the stock market you get in the fourth grade. Logic is the subject that’s helped me the most in picking stocks.”
In his book “One Up On Wall Street“, Peter Lynch said: “Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.”
Peter Lynch said in an interview: “In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten. This is not like pure science where you go, Aha and you’ve got the answer. By the time you’ve got Aha, Chrysler’s already quadrupled or Boeing’s quadrupled. You have to take a little bit of risk.” Peter Lynch said “All the math you need in the stock market you get in the fourth grade.” Peter Lynch stated “Philosophy and logic are more important than math or finance in picking stocks.”
Need safety margin
The intrinsic value of a stock cannot be determined through precise calculations. This is exactly what Buffett observed: “The potential and fundamental value of a stock is a value that cannot be determined, but must be estimated.”
Buffett said: “Calculations of intrinsic value, though all-important, are necessarily imprecise and often seriously wrong. The more uncertain the future of a business, the more possibility there is that the calculation will be wildly off-base.”
Benjamin Graham:”Mathematics is ordinarily considered as producing precise and dependable results; but in the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative are the conclusions we draw therefrom.”
Benjamin Graham wrote: “The combination of precise formulas with highly imprecise assumptions can be used to establish, or rather to justify, practically any value one wishes.”
Fingers and toes investing
In 1996 Berkshire Hathaway annual meeting:
- Charlie Munger: “We have such a “fingers and toes” style around here. Warren often talks about these discounted cash flows, but I ’ ve never seen him do one . . .”
- Warren Buffett responsed immediately:That’s true. It’s sort of automatic. If you have to actually do it with pencil and paper, it ’ s too close to think about. It ought to just kind of scream at you that you ’ ve got this huge margin of safety.
This is why Buffett quoted the famous saying of the economist John Maynard Keynes “It is better to be roughly correct than to be precise.”
Quantitative is not priority one
Friedrich Hayek has the same view. He believes that almost everyone pays too much attention to quantitative factors, because these values can make use of statistical techniques taught in schools; and factors that are difficult to measure may be more important.
Albert Einstein once hung a striking slogan in his laboratory “Not everything that matters can be measured.”
Closing words
Keep what Peter Lynch said in your mind “All the math you need in the stock market you get in the fourth grade.”
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