Investing in joint stock companies has a come a long way since a bunch of disparate investors in London, agreed to partake in the risk and return of establishing a permanent settlement in the “New World” and formed “The Virginia Company”. Risk was involved not only in financing a venture that could potentially fail, but also in recovering the upside in case of one.
Settlement risk in investing has, since, been considerably reduced, with counter-party risk significantly reduced through the introduction of clearing house for trades, backed by investor protection funds.
One thing that has not changed, however, is the uncertainty regarding how to approach an investment decision. Investors often are regarded as belonging to one of two (sometimes opposing) groups – one which swears by estimating the future cash flows of companies (fundamental analysis) and another that attempts to predict stock price from past stock price moves (Technical analysis). But these are by no means the only schools of thought. The theorist (capital asset pricing model) would have you believe that price movements are random, therefore unpredictable. Another set of theorist add to the chaos by trying to adopt “chaos theory” (yes – there is a theory for that too!) to the capital markets. A somewhat recent approach which has thrown its metaphorical hat in the ring – is behavioural finance.
Adherents of each school will often go to any lengths to disparage the claims of the other groups. But do any of the approaches single-handedly define the whole “truth” of the investment process? Is it not true that each approach only serves to describe the market only in part, and that over long periods, a particular approach may be unable to offer any significant insight into the investment process.
I have often been struck by the similarity this has to the story of the blind men and the elephant
It does suggest that like with most human attempts to understand the nature of “reality” – the deeper one delves, the more one realizes the limits to the knowledge acquired thus far. As Bertrand Russel stated “I think we ought always to entertain our opinions with some measure of doubt. I shouldn't wish people dogmatically to believe any philosophy, not even mine.”
In the end, I wonder if our ancients were indicating something to us, when they chose Ganesh – the elephant god, as the God who overcomes obstacles (and now the reigning deity of the stock markets) – perhaps reminding us not to behave as the “blind men”? Keep an open mind, and if you feel dogmatic about a particular idea, remember – the only dogma worth falling in love with is to be found in Asterix comics
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