Newton’s equity investment


By Tensing Rodrigues*

One of the greatest physicists and mathematicians of all time, Isaac Newton’s discoveries and inventions widened the reaches of human thought and demonstrated the power of the scientific way of thinking. Newton’s three laws of motion set the foundation for modern classical mechanics. His discovery of the gravitational force gave man the ability to predict movements of celestial objects. How successful do you feel he was in equity investment?

You may be thinking that I am trying to pull your legs. No. Benjamin Graham, the value investment guru of the late fifties, talks about Newton’s stock investing experience in the 1700s. Newton owned shares in the South Sea Company, then the hottest stock in England. Market was exuberant; Newton was perplexed. He is said to have exclaimed, “I can calculate the motions of the heavenly bodies, but not the madness of the people.” He sold his stock at a 100 per cent profit.  Months later, drawn by the sheer force of gravitation he bought back the stock at a much higher price. The result was a huge loss.

The moral of the story is simple. Duds like me with an IQ well below that of Newton need not despair. Equity investment requires far less intelligence. What it does require is sheer common sense and a sense of humility – the humility to know when to give up a cocksure prediction!

The problem with intelligence, as commonly understood, is that it gives you an exalted position from which to perceive the reality, in this case the stock market. Being intelligent you find it easy to, and may actually, acquire a lot of training; which further hones your intelligence. But what happens in practice is that your field of vision gets narrower and narrower; worst till, it gets selectively narrower. You see only what you feel is true. The rest becomes madness. You fail to realize that a lot of this madness is about real; it is what really moves the market. The world of theories and laws to which the intelligent people confine themselves often excludes the real world. That is what is called the ‘confirmation bias’.

But, you will say they are successful. Right; Newton made 100 per cent profit to start with. It is then that they become more dangerous. Successful equity investors are led to teach others. So far not so bad. But when they take on that mantle for a living, that is, when they become professional portfolio managers or portfolio salesmen, they become the tyrannosaurus rex, one of the scariest and deadliest dinosaurs around with a bite force three times that of a great white shark.

Their intelligence and knowledge acquired over time gives them the bite force. But none of it is at your service. You are just the prey that they need to survive. It is not the stock market that lies in the field of their vision now, but the market for equity investment, comprised of unintelligent investors like us.

So beware; beware of exceptional intelligence. You need not be exceptionally intelligent to be a good equity investor. You need not have qualifications in finance and investment. You need not spend all your time on trading screens. But, as we said earlier, you definitely need to have common sense and humility to know when you could be wrong. Common sense to see things from the point of view of the common folk; for at the bottom of the stock markets lie the simple, often stupid, decisions made by simple folk, who choose between the sunflower oil and rice bran oil, and move the fortunes of the companies producing them. And humility to change because you are likely than not to be wrong, not because you are not competent,  but because you are not a prophet. When you feel you are wrong, cut your losses and change the track; or rather, change your track and cut your losses. That is the intelligence the market requires and rewards.

Years back, when the markets were good, and I thought I was intelligent, I bought in IPOs shares of two companies; one was going to make ‘egg powder’ and the other ‘kraft paper bags’. Both made eminent sense. As a ready to use substitute the egg powder would command a huge demand from a generation out to save time. And with the plastics on the way out paper bags would be the sold in tons. I do not even remember now when I dumped those share certificates in the bin.


*The author is an investment consultant. Readers can send their comments and queries to [email protected]