Investors and Scientists - Chetan Parikh

In a great book, "The only three questions that count", the author, Ken Fisher, writes about investing and scientific inquiry.

“When I was a kid, if you wanted to be a scientist they made you take Latin or Greek. I was a good student generally and took Latin not because I wanted to be a scientist—I didn’t—but because I couldn’t figure out the benefit of my other options, Spanish or French. Since no one speaks Latin, I forgot almost everything immediately thereafter, except the life lessons in which Latin abounds—like Caesar distinguishing himself by leading from the front of his troops, not the rear as most generals did (and do). It’s maybe the most important single lesson of leadership.

Another lesson: The word science derives from the Latin scio—to know, understand, to know how to do. Any scientist will tell you science isn’t a craft; rather, it’s a never-ending query session aimed at knowing. Scientists didn’t wake up one day and decide to create an equation demonstrating the force exerted on all earthly objects. Instead, Newton first asked a simple question like, “I wonder what the heck makes stuff fall down?” Galileo wasn’t excommunicated and immortalized for agreeing with Aristotle. He asked, “What if stars don’t work like everyone says? Wouldn’t that be nuts?” Most of us would see the best scientists of all time, if we could meet them face-to-face, as maybe nuts. My friend Stephen Sillett, today’s leading redwood scientist, changed the way scientists think about old growth redwoods and trees in general by shooting arrows with fishing lines tied to them over the tops of 350-foot-tall giants, tying on a firmer line, and free-climbing to the tops. He found life forms and structures up there no one ever knew existed. Dangling off those ropes 350 feet from terra firma is nuts. Nuts! But he asked the questions: What if there is stuff in the very tops of standing trees that isn’t there when you cut them down? And if there is, would it tell you anything about the trees? In the process, he discovered much no one had ever known existed. Why am I telling you this?

Because most of what there is to know about investing doesn’t exist yet and is subject to scientific inquiry and discovery. It isn’t in a book and isn’t finite. We just don’t know it yet. We know more about how capital markets work than we did 50 years ago, but little compared to what we can know in 10, 30 and 50 years. Contrary to what the pundits and professionals will have you believe, the study of capital markets is both an art and a science—one in which theories and formulas continually evolve and are added and adjusted. We are at the beginning of a process of inquiry and discovery, not the end. Its scientific aspect is very much in its infancy.

Scientific inquiry offers opportunities ahead as we steadily learn more about how markets work than we ever imagined we could know previously. What’s more, anyone can learn things now that no one knows but in a few decades will be general knowledge. Building new knowledge of how capital markets work is everyone’s job, whether you accept that or not. You’re part of it, whether you know it or not. By knowingly embracing it you can know things others don’t—things finance professors don’t know yet. You needn’t be a finance professor or have any kind of background in finance to do it. To know things others don’t, you just need to think like a scientist—think freshly and be curious and open.

As a scientist, you should approach investing not with a rule set, but with an open, inquisitive mind. Like any good scientist, you must learn to ask questions. Your questions will help you develop hypotheses you can test for efficacy. In the course of your scientific inquiry, if you don’t get good answers to your questions, it’s better to be passive than make an actionable mistake. But merely asking questions won’t, by itself, help you beat the markets. The questions must be the right ones leading to an action on which a bet can be made correctly.”