Scientific Investing is an approach that is 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 assets to get a predictable cash flow, buying it below its intrinsic value and selling it once it goes beyond its intrinsic value with a firm focus on margin of safety at every step. Getting deeper into Scientific Investing is not the agenda for this article, but to understand if you are a Scientific Investor, the one who can follow Scientific Investing principles and aspire to be ahead of Mr. market. Let us approach this by inverting the question and understand who is not!
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. Basic principles of investing are grounded in some of the very 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 go through market cycles without falling prey to greed and fear. Outsourcing it all without even the basic understanding exposes you to FOMO, mis selling and misallocation.
- You have a short-term orientation. Having a short-term orientation on greed as well as fear will hold you back from making the right decisions. Worrying about what if the stock falls after you buy it, what if you fail to buy what is going up and what if the stock doesn’t go up immediately after you buy it – will not let you invest in the most undervalued opportunities. Patience is the key to successful investing.
- You cannot withstand market volatility. You are a very long-term investor, BUT only till the portfolio is in green. As soon as the portfolio starts going down you think of exiting. Why lose value if you can enter later a lower price? Urge to time the market, especially, when faced by market volatility will force you to stay on sidelines when it is most needed to invest.
- For you the portfolio clean up means selling whatever is in RED. Even when your overall portfolio returns are ahead of the market, it pains you a lot that few stocks/portfolios are still losing money for you. If you are an investor and not a trader, don’t believe in stop loss and cutting losers to add to winners. Focus on mispricing.
- You find comfort in following the herd and cannot be a contrarian. If you spot something which seems to be mispriced but don’t have the character to go ahead and invest as you strongly believe, in spite of your thorough analysis, that someone, somewhere (read institutional investors, global FIIs) knows better and if they are not buying it there must be some issue. Avoiding confirmation bias and asking the right question will enable you to do right allocation. 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 actual name is!).
- You believe that someone can consistently remain ahead of the market. You chase that elusive advisor, manager or influencer who can do this. Anyone who deviates from the market portfolio to be able to generate alpha would have periods of underperformance because of the market anomalies.
- You do not understand the difference between correlation and causality. The only metric for you to judge the goodness of an investment opportunity is the recent performance track record. If the market is going down, economy must be bad. If FIIs are selling something must be bad with the market. If the rupee is depreciating, economy must be weakening. Focus on the Macros, corporate earnings, growth outlook and the valuations and not the past performance.
- You are a pessimist. You have little belief in the long-term sustainability of the economy, country, human ingenuity and innovation. If one sees world coming to an end, World War III approaching, chaos, anarchy, collapse of the financial and economic infrastructure and believe it is all Wild, Wild West then one cannot be a long-term equity investor.
The Scientific Investor succeeds in the long-term due to Originality, Character and Patience. If you do not have these characteristics and still wish to have a successful investment, then the only way is adapt and develop these skills.
“But if it makes a difference to you whether your stocks are down 15% or not, you need to get a somewhat different investment philosophy because the world is not going to adapt to you. You’re going to 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.)