[UPDATED]
MIT finance professor, Andrew Lo recently told a story about Richard Feynman, the Nobel Prize winning physicist. According to Lo, Feynman was speaking to a group at Cal-Tech soon after the 1987 crash and said:
“Can you imagine how hard physics would be if electrons had feelings?”
Think about that for a moment…we often approach investing as if it was some sort of physical science. We often act as if we are dealing with unbreakable laws like gravity when we make our long-term projections about the future, for example, the idea that if I take more risk (invest in stocks) I WILL get more return.
Well, the reality is that investing is NOT physics because markets have feelings.
In fact markets are nothing more than the representation of our collective (often irrational) feelings, and that is a far cry from some cold hard spreadsheet that says that 82.375% of the time stocks do better than bonds. So when we say that if you buy and hold stocks you will earn more money over the “long-term” than if you put all your money in CDs, we should end by saying, “We think.” We really don’t know for sure because there are so many variables that impact what will happen in the future including billions of humans and their feelings.
That is one of the reasons investing is so hard and most of us have had a disappointing experience. We build our plans based on the idea that there are rules but the market doesn’t seem to be following the same rules. In the real world it appears that the stock market might not even be aware that the rules created by economists even exist.
The fact that investing is not ruled by a set of natural law like physics leads me to be more cautious. Not just now, but always. It might be a good idea to keep in mind the old Will Rogers saying, “Don’t tell me about the return on my money, tell me about the return of my money.”
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