Understanding company financial reports and calculating stock valuations, together with fundamental analysis of industries, companies, technologies and business models, are some of the requisites in security selection for portfolio management. At first glance, these disciplines appear to be entirely mathematical and rules-based; surely the most consistent and accurate application of logic should deliver the best estimates of relative value between stocks and result in the optimal portfolio, shouldn’t it?
Not quite. This description is narrow and oversimplifies the task. While history may teach us valuable lessons about the future, it is not an accurate sextant by which to navigate a course. The ‘science’ of investment also has a soft side, an ‘art’ or ‘fuzzy logic’ sometimes attributed to ‘gut feeling’, which requires a rather different skill set. Creative thinking and an understanding of human psychology to understand why people behave how they do in the real world and to evaluate every possible scenario and its implications to the investor is also needed. Understanding both sides – the maths and the art – and their symbiotic relationship, is a craft.
Capital@risk. For Professional Investors only. UBS Asset Management. Investing is our Craft
