BEING EINSTEIN OR NEWTON IN THE MARKETS….

about 11 months ago
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What if you had the IQ of Einstein or Isaac Newton? Would that guarantee you success in every endeavor of life?

Maybe if it was us sitting under a tree and an apple fell down, instead of gravity, we might feel smug eating it up or better still, look up and pluck out some more!

That’s how we all are – all are wired differently and a higher IQ does not mean success. Did you know that Einstein and Newton, both were completely at sea when it come to stock market and lost immense amounts of money?

Einstein invested almost his entire prize money from the 1921 Nobel Award in the stock markets and he lost almost all of its when the markets crashed in 1929.

Prior to that, Isaac Newton, who was more of a cautious investor, put all his money into Govt bonds – uneventful but gave him a steady and predictable source of income. Then the London stock markets started booming and he tentatively put some of the money; that went well so he converted some bonds into equity; that too went well and driven by greed – he was already rich, he wanted to get richer. Soon, almost all his bonds had become equity and then that winter, the markets collapsed and Newton’s losses were irrecoverable.

Einstein and Newton, both were brilliant and numbers were their lifelines. All their scientific calculations were based on time, risk and mathematics; yet none of this genius worked in their favor when it came to the stock markets.

The underlying lesson here – the stock markets still crumble the way they did 300 years ago and geniuses during each era make errors and those mistakes matter, because we all continue to repeat the same mistakes, over and over again. Forgetfulness is only one of the reasons bubbles happen again and again.

The BIG lesson here - when financial markets offer the temptation of ever-rising values, not even the smartest people can resist!

Everything about the market cannot be zeroed down to being mathematical and scientific. There is something known as the human element or behavioral decision making – stock picking can neither be standardized nor computerized.

So, while picking the stock, the golden rule - Fundamentals never go out of fashion. New technical theories might come up, yet, the way we assess the fundamentals of a company remains same, irrespective of the good times or the bad times. By fundamentals we mean healthy earnings, management quality, past track record, macro conditions of the industry, debt undertaken, cash balance and above all, reputation. Today, integrity is the single most important ingredient which can make or break a company. And once fundamentals are in place, a five-year time span still remains the best long-term time measure.

Yes, buy and hold continues to work, paying no attention to day-to-day happenings.  Equities as an asset class always tracks earnings growth. Thus if the earnings have grown by around 15%, the returns on stocks should also be around the same level. 

If only Newton and Einstein had listened to their inner voice for guidance…..

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