“Are you an artist or a scientist? An engineer or a poet?” So asks NYU finance professor and valuation specialist Aswath Damodaran in a recent blog. He goes on to lament that we live in a time when we must pick sides, even though it would be far more productive to bring both sides together. “The best of investing,” he says, “is built on a combination of story telling and number crunching . . . a marriage of numbers and narrative.”
Damodaran was inspired to write this after vacationing in Florence and seeing the marvelous Brunelleschi Dome built in the 1400s at the Santa Maria del Fiore cathedral. The designer of the dome, Filippo Brunelleschi, was both an artist and an engineer. He belonged to a guild for artistically inclined goldsmiths and metal workers, but also came up with the ingenious solution required to build a freestanding dome large enough to cover the intended cathedral space.
The point is that there are many spheres of life where quantitative and qualitative should work together – and investing is one of them.
In his excellent “Thirty Years: Reflections on the Ten Attributes of Great investors,” investor Michael Mauboussin not only reflects on his three decades of investing experience, but also articulates ten attributes that great investors have.
The first of the ten is “Be numerate (and understand accounting)” -- and there is no equivocation here. Being comfortable with numbers is essential to fully grasping what companies are about, valuing them, and making investment decisions.
But then Mauboussin goes on to list attributes of great investors that are far fuzzier. You must be able to understand strategy, and the key to strategy is understanding trade-offs. You must be able to distinguish between fundamentals and expectations. You must be ever aware of your behavioral biases. You must understand how social influence gets exerted because “investing is an inherently social exercise,” and it is critical that you do not get sucked into the vortex of influence.
The final and tenth attribute is that you must read a lot. I’m not sure if Mauboussin is completely serious or not when he brings in Todd Combs, who works with Warren Buffett at Berkshire Hathaway and suggests reading 500 pages a day. But the point is that you must read a lot and read across disciplines – beyond business and finance to science, art, history, philosophy.
And that brings us back to Damodaran’s lament about the divide between art and science and our age of siloed specialists. Our investment world, he says, is filled with “option traders who act as if their derivative securities can exist without their underlying assets, fixed income investors who function as if bonds are the only game in town and equity investors who can only talk about stocks.”
But where are the Renaissance men and women? These would be the “investors who can move with ease across markets and are just as comfortable with stories as they are with numbers.”
“This is my subjective judgment,” Damodaran says, “but I think that there used to be more of them three decades ago, when I started in investing, and they seem to become rarer by the day.”