Investing as science, an art form and a game

You may have already guessed that my financial priorities have been changing lately. When I first started this blog, the priority I was pursuing with the focus and determination of a top athlete was recovery: recovery from the rather large consumer debt that the 2008 credit crunch brought with it. Well, it did bring it but we also fell for it (here, I did take some responsibility and it feels good). Now that we will be debt free in a matter of months, I am determined that the good habits of earning more and spending less are not going to go to waste. This, however, means that we will have a rather large positive cash flow and we have to decide how to invest money. Of course we can leave it in savings accounts – it is probably time for us to have maxed up ISAs – but is it really worth it? Keeping large amounts of money in savings accounts, particularly at the current pitiful rate of interest, is like keeping water in a dam when the crops need watering.

This is why I have been looking very seriously at different investment options and finding that this is so complex it makes my head hurt; and there aren’t many things that do that. From what I have seen though, investing is a combination between science, art and gaming. This is what makes my head hurt – I can’t think of another activity that combines the three; these also need completely different sets of competence and different combinations between knowledge, intuition and awareness of risk and probability.

Probably the best example of investing as science is provided by the Boggleheads’ philosophy: this is all about well informed choice. It may be choice of lifestyle, choice of investment instruments etc. Interestingly, approaching investment as science and research features both a particular stage of learning about it and specific investment instruments. I believe that research is absolutely essential to be able to choose risky stock to buy; and that this research should be rather broad (learn most there is to know about the product, the company, the key people in the company and the others who have similar product).

Next, is investment as an art form. This, I believe, kicks in when one is shaping and re-shaping their portfolio – what investment portfolios look like is not a matter of science and research but of feeling and balance.

The aspect of investment that fascinates me most is the gaming part of it. This applies to specific investment instruments like some options, exchange-traded funds (ETFs), CFD trading (Contract for difference) and different forms of financial spread betting. These are all rather speculative investments. CFD trading, for instance, is an equity derivative used by traders (investors) to speculate on the share price of particular shares without actually holding any of these shares; the contract between the two parties is about paying the difference between the current price of the share and its value within certain time frame. High risk but can be potentially very rewarding.

Now, if I were you a question will be forming in my head: how is doing CFD trading different from betting on the horses?

It is different because is still needs a large amount of research and art to be able to do it to your advantage. CFD trading success is a result of knowledge and application.

Looking at these three aspects of investing – science, art and gaming – I have been thinking that I have a bit of a problem with the latter two. Science is not an issue: I even cook like a scientist. But do I have the imagination, abandon and courage for the other two?

How about you?

23 thoughts on “Investing as science, an art form and a game”

  1. My investing philosophy is long term and mostly vanilla choices.  I tend to pick mutual funds, ETFs and a few individual stocks.  I keep it simple by selecting index funds for the most part.  It works for me.

    1. @Krant: Glad it works for you; keeping it simple is of course important, but as much as I like vanilla some variery is always a good thing :).

  2. i love the analogy… and you are right.  developing a proper investment (and finance, in general) strategy is a very multi-faceted endeavor.. like most science investigations, it takes patience and time to get it right…

  3. I think the main thing is that you should not go for risky investments with any money you cannot afford to lose.  Then it could become a potentially profitable hobby – or business, I suppose.

    Just remember that risky investments in, the form of lending, by the banks are how we got into this mess in the first place.

    If you did go that route, just be aware of the possibility of addiction  and NEVER throw good money after bad.

    Me, I’m a wimp when it comes to gambling.  I don’t even buy a lottery ticket. 

  4. Like Pat mentions I’d say don’t bet the farm! Boring mutual funds, a bit of single stock with high dividends is all we’re into now. I could add REIT route, but boring lets me sleep at night and make money. If I want a roller coaster ride, I’ll go to Disney Land. 

  5. While I understand and appreciate the point, I don’t agree with Pat. I don’t know what to risk until I know what the goal is. Once I know what return I need to reach the goal, then I structure my risks according to that objective. If I find I can’t stomach the risk, then I have to change the goal.

    There are many people out there following the advice to “not risk anything” that will “safely” never reach their goals. 

    This “science” is good news for investors. As you research investments you can narrow your choices so the “art” and “gaming” don’t burn you too much. At some point you have to have “art” and “gaming” but my goal is always to minimize the risks that “art” and “gaming” present.

  6. My investing is dollar cost averaging into target retirement date funds for retirement and a balanced fund for my closer term goals. If my time frame is super short I just “invest” in a savings account. I’m getting a return, albeit poor, but it is still investing.

  7. I think there are a number of different definitions for “investing.” It is what you make it. It can be a gamble, it can be an art, and it SHOULD BE a science. I favor the scientific approach the best.

  8. I had a guy come up to my father and me while we were at the racetrack and whisper the numbers 6 8 4 to us. He then said it again and walked away. He hit it right on the nose and won $2k and my father and I walked away in awe. Insider? I am sure but hey never doubt a few dollars at the racetrack. 

    In the last 3 months I started trading again. I am happy to say I am leaning a lot and growing my money. Yes there are rocky roads but I confident that with discipline I do well.

    If not there is always 6 8 4.  

  9. I think a lot of people cook like scientists. In fact, I generally look at the people who don’t  like they are weird. For instance, what do they  mean that they don’t know how much sugar to add? That’s so aggravating…. a rant for another day.

    1. @Roshawn: Glad to hear there are many others like me. When I cook, if the book says 23 grams of something I measure exactly. This is why Jamie Oliver is not for me : he does pinches, glugs and other measures that become an articst in the kitchen rather than a scientist.

  10. Pingback: Carnival of Retirement # 28 – July 16th, 2012 Edition |

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