When people at parties find out that I’m a Wealth Advisor working in the investment industry, permitted to buy and sell stock, they’re eager to quiz me on my opinion of one company or another, or one industry or another. 

It makes for great dinner table conversation, but it is decidedly UNhelpful when it comes to creating personalized investment portfolios. If the pressure to advise gets too great, I ask for the butter and change the subject. (Queue a chuckle). 

Creating an investment strategy for my clients is a combination of science and art. There’s a science to investing, reflected in the fundamental truths of how companies are valued and how the stock market works.

Art is the pairing of the right type of investments, reaping the benefits of growth, managing risks, and controlling the emotions associated with how the stock market works. Then translating all that into an investment strategy that fulfills your (very personal, unique-to-you) goals. I’ve addressed some of the artfulness in previous blogs (Answering Why? & Abundance: Do I have enough?) and will continue to explore it over time.

So, what about the Science? I’m going to talk mainly to the stock market, not the bond market, in this post. 

In the beginning, the stock market was created to allow companies to access capital (aka money) to grow their business. The stock market is in fact a market: a place where buyers and sellers meet to change ownership of a company through shares. For every buyer there is a seller. For every seller there is a buyer. Otherwise, no transaction takes place.

A company’s share price is set in the initial public offering – by comparing it to similar companies that are already trading. It’s sort of like deciding on the listing price of a home. Then the share price will start to fluctuate as new information is available. 

Over time, these public companies innovate, expand and grow in value. Short-term snapshots of the market show prices which can be very unpredictable, fluctuating up and down like a roller coaster.  With a long-range view, patterns start to emerge.

As an investor, you can increase your confidence that return patterns observed in the past did not just happen by chance and are likely to persist in the future if solid research provides proof that:

1. There is a sensible explanation for the pattern.
2. The pattern is persistent through time.
3. The pattern is pervasive across markets.
4. The pattern is robust to alternative specification.
5. The pattern can be cost effectively captured in broadly diversified portfolios.

Accepting that stock prices reflect all available information enables you as an investor to tune out noise. By the time you read about something in today’s paper, the information is most likely already baked into the cake we call prices.

That’s not to say that the share-price for every single company in the market is always dead-on accurate, but it does mean that at any given time, the market reflects the price at which stock in a company changed hands.

The cost-effectiveness of capturing a return that’s greater than the return of the entire market is one of the most challenging factors.

If you begin to understand that, you can stop worrying and stressing over how any new information will affect the investment plan going forward. This is why we like the paycheque strategy for money that’s earmarked to provide guaranteed cashflow.

So when Tim Ferriss asked him “how would you invest your first million dollars, assuming that you can cover 18 months of expenses with other savings? Thank you in advance for being as specific as possible with asset classes and allocation percentage,” financial guru Warren Buffett answered: “I’d put it all in a low-cost index fund that tracks the S&P 500 and get back to work…”

Other financial ‘scientists’ back him up:

 “Although it’s easy to forget sometimes, a share is not a lottery ticket… it’s part-ownership of a business.”  - Peter Lynch, Fidelity

 “The most important thing about an investment philosophy is that you have one you can stick with.” - David Booth, Founder of Dimensional Fund Advisors

 “The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.” - Benjamin Graham, author of The Intelligent Investor

 “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” - George Soros, financial analyst, author and investor

I agree, George. Good investing is boring, no matter how much drama the discussions whip up. Please pass that butter.

Do you think investing is more art, or more science? Why? Leave a comment through our Contact Us page. If you want to discuss a different approach to investing, let us know. Email us here and let’s start the conversation.