Scientific Investing is an approach based on the first principles of investing, which are rooted in the concepts of cash flows, intrinsic value and portfolio construction. At the very least, the basic idea of buying an asset to get a predictable cash flow, buying it below intrinsic value and selling it once it goes above intrinsic value, with a firm focus on the margin of safety at every step. The intention is not to delve deeper into Scientific Investing, but to understand whether you are a Scientific Investor, the one who can follow the principles of Scientific Investing and strive to be one step ahead of the market. Let’s approach this by turning the question around and understanding who isn’t!
You are not a Scientific Investor if:
- You believe in outsourcing (to your friend/relative/advisor) the burden of learning and following the basics of investing. The basic principles of investing are based on some of the basic principles of a successful life, such as rationality, discipline, possessing and applying wisdom and self-control and integrity. These traits can also help investors navigate market cycles without falling prey to greed and fear. If you outsource it all without even the basic understanding, you open yourself up to FOMO, misselling, and misallocation.
- You have a short-term orientation. A short-term orientation toward both greed and fear will keep you from making the right decisions. If you’re worried about what happens if the stock falls after you buy it, what if you fail to buy what’s on the rise, and what if the stock doesn’t rise immediately after purchasing, you can’t invest in the most undervalued opportunities. Patience is the key to successful investing.
- You can’t handle market volatility. You are a long-term investor, BUT only until the portfolio is green. As soon as the portfolio starts to drop, you think about getting out. Why lose value if you can enter a lower price later? The urge to time the market, especially when faced with market volatility, will force you to sit on the sidelines when investing is most needed.
- For you, cleaning up the portfolio means selling everything that is in RED. Even if the total portfolio return is higher than the market, it hurts that few stocks/portfolios are losing money for you. If you are an investor and not a trader, don’t believe in stop-loss and limiting losers to add to the winners. Focus on mispricing.
- You find comfort in following the herd and cannot be contrary. If you spot something that seems mispriced but doesn’t have the character to go ahead and invest because despite your thorough analysis, you strongly believe that someone somewhere (read institutional investors, global FIIs) knows better and if they don’t buy it, there must be a problem. By avoiding confirmation bias and asking the right question, you can make the right attribution. Don’t be afraid to be original. You don’t have to be the next Warren Buffett, but be the first Varun Bhatt (or whatever your real name is!).
- You believe that someone can consistently stay ahead of the market. You chase that elusive advisor, manager or influencer who can do this. Anyone who deviates from the market portfolio in order to generate alpha will experience periods of underperformance due to market deviations.
- You don’t understand the difference between correlation and causation. The only measure by which you can judge the goodness of an investment opportunity is its recent track record of performance. If the market is down, the economy must be bad. If FIIs are selling something, there must be something wrong with the market. If the rupee depreciates, the economy must weaken. Focus on the macros, corporate earnings, growth prospects and valuations, not on past performance.
- You are a pessimist. You have little faith in the long-term sustainability of the economy, the country, human ingenuity and innovation. If you see the world coming to an end, World War III approaching, chaos, anarchy, collapse of the financial and economic infrastructure and believe it’s all Wild West, then you cannot be a long term stock investor.
The Scientific Investor is successful in the long term thanks to Originality, Character and Patience. If you don’t have these characteristics and still want to make a successful investment, the only way is to adapt and develop these skills.
“But if it makes a difference to you whether your stocks are down 15% or not, you’ll need to adopt a slightly different investment philosophy, because the world won’t adapt to you. You will have to adapt to the world.” – Warren Buffett, 60th Annual Meeting, May 2025.
(The author of the article, Ashwini Shami, is president and chief portfolio manager of OmniScience Capital.)
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