On Science and Art - Illustrated with an Example regarding Security Analysis

2010-03-08T12:28:00.000-08:00

This post is copied from my other blog, In The Quest of Truth.

The debate over science and art is louder than ever before, in the human history that we are aware of. We can vividly see from our own life and society the pace at which science overtakes art. In one of the post in this blog 'Are Miracles Religious', we attempted to define miracle as "an event that appears inexplicable by the laws of nature" and finally added - "as the spectrum of naturalness increases through scientific means, the word miracle itself will vanish." But in this post let me try to elaborate it a bit more by synonymizing the word 'miracle' with 'art'. If we substitute 'art' with the later quoted sentence, it sounds - "as the spectrum of naturalness increases through scientific means, the word art itself will vanish." That sounds weird, because it can also mean that as the scientific knowledge increases, we forget to appreciate art. Do we really? Are the cuboid shaped utility buildings substituting the magnificent architects of the past? Are white and gray suits substituting colourful lungies, and salwars? Are blue and white paintings substituting the colourful paintings as we still see in many parts of India? Of course, all the answers are affirmative. But, has this affirmative answer has to do anything contradictory to our assumption above? No.

I shall explain its amicability with the following example, which is from my own experience. I have been analyzing stocks for an year now. Well, that's relatively a very short period. I have been highly reluctant to enter the market and extremely cautious at most of the time, because I simply could not find the 'science' behind it. All what I could see is art or perhaps speculation. That is the reason why most of the people equate stock trading to gambling (which is also an art). And the reason is that most people don't know the science behind it, in fact nobody completely knows it. It may sound that rocket science is more complicated than stock analysis, but in fact rocket scientist can, most of the time predict precisely, the time at which the rocket shall land in the orbit. But, no financial expert or economist can precisely predict, when there shall be a bull market or a bear market. When there is immense scope for rocket scientists to conquer the entire universe, so has an economist to understand the nature of market trends. Courtesy to Benjamin Graham, who with his logical thought and broadness of mind, could bring light into the science of stock market. In fact he reduced the scope of art by spreading light into the 'art' part and converting it into science. Graham would have made security analysis as perfect as mechanics, through his sound value oriented argument. To take profit from the inefficiency of market trend, i.e. the discrepancy between theory and practice, sounds equivalent to generating electricity from the heat produced from friction. At the same time, when Newtonian mechanics can predict the motion of a normal rocket with considerable precision, it cannot precisely measure the mechanics of the rocket if it had moved near to the speed of light. That is the inherent inefficiency of Newtonian mechanics. If Einstein would not have thrown light into the special theory of relativity (assuming nobody else would have), it would be more of an art, to measure the mechanics of the rocket which was traveling near to the speed of light to galaxy nearby. Similarly, even now the picking a stock is a combination of speculation (art) and investment (science). When science dominates art, it becomes relatively a sound investment. And when art dominates science, it becomes more of speculation.

From the above example it can be said that the human quest for science, spreads light on art to show the science behind it. But, I can confidently say that, it is impossible to avoid art. This confidence is the result of understanding the nature of 'nature' itself. Nothing in nature is 100% efficient. If it was so, there would not be any disease, natural disaster and everything will be 'as it is'. We recognize, appreciate the beauty of art since we are not perfect. And that is the reason, for there is competition, and probably evolution.

Existing Theories

2009-06-09T07:13:00.000-07:00

Courtesy: Investopedia

There are lot many theories that come across concerning stock picking. We shall have a concise look at it.

1.So many factors affect a company's health that it is nearly impossible to construct a formula that will predict success. It is one thing to assemble data that you can work with, but quite another to determine which numbers are relevant.

2. A lot of information is intangible and cannot be measured. The quantifiable aspects of a company, such as profits, are easy enough to find. But how do you measure the qualitative factors, such as the company's staff, its competitive advantages, its reputation and so on? This combination of tangible and intangible aspects makes picking stocks a highly subjective, even intuitive process.

3. Because of the human (often irrational) element inherent in the forces that move the stock market, stocks do not always do what you anticipate they'll do. Emotions can change quickly and unpredictably. And unfortunately, when confidence turns into fear, the stock market can be a dangerous place.

There are lot many stock picking strategies. We need to understand how to read a financial statement, financial ratios and other stock picking strategies. For the same you can download the a few very interesting books from the Stock Experiment Site for free.

From the Beginning!

2009-06-08T21:02:00.000-07:00

From the Beginning, human beings started to organize, and hence to 'share'. When one guy started to share his energy and in turn received the benefits, he became a part of a market. This small market continued evolving with the power of communication and technology which resulted in centralized markets, now known as stock markets. Soon in future we may see a single 'WORLD STOCK MARKET', which may be the ultimate market on earth.

In this blog we aim to learn the science and art of stock picking for the highest possible return at a particular time interval.

Stock Experiments

On Science and Art - Illustrated with an Example regarding Security Analysis

Existing Theories

From the Beginning!