Why do Engineers Think They’ll Be Good at Picking Stocks?

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oragne lovre
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by oragne lovre »

To become a better investor, one should learn from other fields that are not related to one's expertise. I agree with the author on this point.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by Clearly_Irrational »

Johno wrote:That's true but I still think there's a tendency among some indexers to exaggerate how much of an advantage they have against *do it yourself* stock pickers.
I think if a stock picker has at least 50 well diversified positions he could achieve similar results, but for 0.17% fees someone else will do all of it for you. The record keeping alone would be worth that I think.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by Johno »

Clearly_Irrational wrote:
Johno wrote:That's true but I still think there's a tendency among some indexers to exaggerate how much of an advantage they have against *do it yourself* stock pickers.
I think if a stock picker has at least 50 well diversified positions he could achieve similar results, but for 0.17% fees someone else will do all of it for you. The record keeping alone would be worth that I think.
I think indexing is fine, as I said I don't pick stocks as a rule, and index ER's can be less than .17%. Still, your statement 'could achieve similar with 50 stocks' seems to suggest the exaggeration in the advantage of diversification and general assumption of efficient market theory=reality that I was speaking of. In reality there's a big random element which makes it difficult to separate out the relative advantages of skill (in stock picking) and diversification. And there's no point in *picking* particular stocks if you're going to pick 50 of them. Fifty stocks is somebody trying to DIY *index* to beat the ER, not pick stocks. Somebody actually picking stocks, probably many fewer than 50, might be good at it, and thus have an advantage doing it. And if they mix DIYSP with index, and depending how diversified their non stock portfolio is (I note sometimes people who insist you need dozens of stocks to 'diversify' turn out to have half their NW in one single family house, 'that doesn't count'...sure it does :D ), the difference in risk might not matter or again be very difficult to prove.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by lee1026 »

Record keeping is typically done for free by a brokerage firm. And maybe I am just weird, but 17 bps per year is a lot of money to me. It would represent my single largest recurring bill.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by nedsaid »

I have known engineers in my lifetime but I neglected to ask them how they invested their money. So I have to go by what other posters have said here.

I suppose people with very strong math backgrounds would tend to believe that successful investing is all about math, that everything can be explained by numbers. I certainly take the math into account but I think the math while very important is secondary to understanding human behavior. I think this is what trips up the quants, people can be very irrational and this irrationality is difficult if not impossible to accurately predict. We know people will behave irrationally but we don't know when. Human behavior is a wild card or a clink in the works that baffles the quants.

Having a good math background is very helpful for an investor. But it isn't the whole story. This is what trips up very bright people.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by Epsilon Delta »

nedsaid wrote:I have known engineers in my lifetime but I neglected to ask them how they invested their money. So I have to go by what other posters have said here.

I suppose people with very strong math backgrounds would tend to believe that successful investing is all about math, that everything can be explained by numbers. I certainly take the math into account but I think the math while very important is secondary to understanding human behavior. I think this is what trips up the quants, people can be very irrational and this irrationality is difficult if not impossible to accurately predict. We know people will behave irrationally but we don't know when. Human behavior is a wild card or a clink in the works that baffles the quants.

Having a good math background is very helpful for an investor. But it isn't the whole story. This is what trips up very bright people.
Math is not the problem. Mr. Bogle's argument, that index investors get average returns and that costs matter, is a mathematical argument, with no human behavior involved. People who don't understand Mr. Bogle are not good at math. People who understand Mr. Bogle and choose to do otherwise have behavioral issues, often they simply don't trust math.

If engineers choose to pick stock* it's not because they're good at math, it's because they're not good enough at math.

* something there is no real evidence for.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by Tycoon »

Is there objective evidence that proves engineers actually think they'll be good at picking stocks? The premise of this thread is that they do, but I have not seen any evidence that proves they do. Is there scholarly research supporting this claim, or is it an observation not based in fact? Perhaps I missed it?
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by LongerPrimer »

Phineas J. Whoopee wrote:
bhsince87 wrote:...
It could be great to marry a little bit of, say, each of the top 500 spouses in America.... :happy
Didn't you mean to say, marry a little bit of each of the top 500 biggest spouses in America? :happy
PJW
Top and Biggest are good. However both are relatively discovered and already known. These particlar pools may be faulty products and could have more downside risk than upside potential - also not a healthy thing for him to do. We hope he is looking at the saplings with strong rootstock, good caliper, well branched and filled out. [One previous life as an orchardist] :shock: :annoyed

So far he has an eye for good products. :mrgreen: :?
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by VictoriaF »

Phineas J. Whoopee wrote:
bhsince87 wrote:It could be great to marry a little bit of, say, each of the top 500 spouses in America.... :happy
Didn't you mean to say, marry a little bit of each of the top 500 biggest spouses in America? :happy
PJW
In the context of this particular investment, small-value seems preferable to large-growth.

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oragne lovre
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by oragne lovre »

I assume Newton knew a lot about math but he still lost his money in the tulip craze. It was follow-the-herd behavioral issue, not the math, that did him in.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by couponhead »

Young engineers often pick stocks.

Young engineers come out of school being told that they are smarter than the average. An early round of lucky stock picking (or starting their career in a boom market) can lead them to think that, because they are generally smart people, they must be genius investors.

Time, experience and a downward market often teaches otherwise.

This is part of the reason that doctors get stuck in investment scams disproportionately frequently; having one's intelligence recognized in one field results in overconfidence in another.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by nedsaid »

Epsilon Delta wrote:
nedsaid wrote:I have known engineers in my lifetime but I neglected to ask them how they invested their money. So I have to go by what other posters have said here.

I suppose people with very strong math backgrounds would tend to believe that successful investing is all about math, that everything can be explained by numbers. I certainly take the math into account but I think the math while very important is secondary to understanding human behavior. I think this is what trips up the quants, people can be very irrational and this irrationality is difficult if not impossible to accurately predict. We know people will behave irrationally but we don't know when. Human behavior is a wild card or a clink in the works that baffles the quants.

Having a good math background is very helpful for an investor. But it isn't the whole story. This is what trips up very bright people.
Math is not the problem. Mr. Bogle's argument, that index investors get average returns and that costs matter, is a mathematical argument, with no human behavior involved. People who don't understand Mr. Bogle are not good at math. People who understand Mr. Bogle and choose to do otherwise have behavioral issues, often they simply don't trust math.

If engineers choose to pick stock* it's not because they're good at math, it's because they're not good enough at math.

* something there is no real evidence for.
Math is absolutely not a problem in understanding how indexing works. Math is absolutely not a problem for an investor, indeed math skills are very, very important. I have made the statement many times that valuation matters and matters a whole lot. The ways in which you determine value rely on math skills. But one has to understand what is behind the numbers they are analyzing, for example companies can manipulate their earnings numbers to some degree. In accounting, there is human judgment involved so earnings numbers can be a bit fuzzy. What I am saying is that there are limitations to what math can do. The output depends on how good the input is.

Math can describe what happened in the past and give great insight as to why it happened but has many fewer powers in predicting the future. Attempts to quantify human behavior and project it out into the future don't seem to work out too well. We have to take into account human behavior which can be erratic and unpredictable.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by LongerPrimer »

For DS his picks (that I know of): A social media website that he uses; Big integrated software where he had worked as a intern; His current company (ISOs); and a company where his CEO asked another CEO to give a presentation. His picks had nothing to do with math or balance sheets. :beer :annoyed
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by Sunny Sarkar »

To OP: I think as engineers we develop an unconscious tendency towards trying to reduce every system down to a few control variables, and then try to use those few variables to control or predict the system's behavior. That's mostly what we are trained to do. Where we go wrong is in identifying very complex systems in real life that have too many variables to which this methods do not apply - like society, relationships, economy, stock picking, etc. In stock picking, the whole idea of fundamental or technical analysis is that we can decide the future movements of stocks if we just look hard enough at a few variables - like P/E, or Beta, or moving averages, or <put your favorite here> - but it's just not that simple a system.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by nedsaid »

Sunny Sarkar wrote:To OP: I think as engineers we develop an unconscious tendency towards trying to reduce every system down to a few control variables, and then try to use those few variables to control or predict the system's behavior. That's mostly what we are trained to do. Where we go wrong is in identifying very complex systems in real life that have too many variables to which this methods do not apply - like society, relationships, economy, stock picking, etc. In stock picking, the whole idea of fundamental or technical analysis is that we can decide the future movements of stocks if we just look hard enough at a few variables - like P/E, or Beta, or moving averages, or <put your favorite here> - but it's just not that simple a system.
+1. Your clearly articulated what I was trying to say above. Thank you.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by dbr »

I think my background and experience in engineering directs me against stock picking rather than toward it. I admit I have seen colleagues behave exactly as in the blog, but that baffles me. I have seen more of my colleagues who would not attempt to pick stocks. Maybe for me engineering was always hard enough that success never seemed that certain. I have a healthy respect for the world as it is rather than the world as we wish to think it is. Of course, that could also be that while working in what could be called engineering, my education has been in mathematics and theoretical physics (an observation that might seem to contradict the sentence just before this one, but, ah well).
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by DWD »

cheesepep wrote:As an engineer by major and part of my profession, I am good at picking stocks. I just choose the less risky ones and hold them for an extended period, which most people (engineers or not) would be adverse to doing.
Another engineer here. I began investing in index funds since reading about them in the late 80's. I have been convinced by reading this forum that investing in a low cost equity index fund is the essence of simplicity and this is where the majority of my portfolio is, but I do have ~5% of my portfolio in an active international value fund. However, I am always tempted to put 5% of my portfolio in individual stocks, basically screening for value and profitability and holding for the long term as cheesepep does. I look at it as a challenge to beat TSM. Maybe when I retire and have more time (and hopefully enough money). :happy
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by hiddensee »

EMH doesn't apply to stock picking in general, since the real world contains friction. Trading frequently results in losses not related to the underlying value of the assets and small stocks are less efficiently traded than large stocks.

So if you DIYSP by holding large companies for the long term you probably will not lose out much to indexers but that is because what you have done is to create your own, less diversified, index.


---


On engineers, and assuming it's actually true, I think it's because they reason (correctly) that knowledge of advanced maths and statistics to analyse available data can give them an advantage over the vast majority of other casual investors. This is, after all, the same approach they use to hold down a job that pays much better than the the vast majority of other wage labourers' jobs. What some of these people forget is that they are not just competing with other casual investors, but with institutions, where the relative advantage is reversed.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by nukewerker »

Math has a small part in stock picking. It's useful in looking at stock history and current value but a very poor indicator of the future. Let's take the recent example of Tesco. WB owned a fairly large position. Anyone think he just closed his eyes and picked the stock? Or do you think he and his team of half a dozen or so spent at a minimum days, probably more like weeks or months even before jumping into the position? I'm guessing the latter. This is an isolated case but it could happen with any company at any time. With articles like the one below:

http://www.telegraph.co.uk/finance/news ... hammy.html

Now would be the ideal time to evaluate the possibility of a position. The curtain has been pulled back. I won't take a position because the company is based in the UK and I can't visit a store to see what it's all about but I think it's as good an example as any that math from an outside individual looking in is nothing more than speculation with numbers. Arguably an equally important task if not more important is to interview the management/visit the HQ as described by Buffett and Graham. A lot of times this is not practical but at a minimum in today's society one should be looking at HQ's on google maps and researching the owners before investing in any stock. Anyway I digress. But the reasons engineers are no better than someone with an art degree is that math plays such a small part in the market.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by Valuethinker »

Sunny Sarkar wrote:To OP: I think as engineers we develop an unconscious tendency towards trying to reduce every system down to a few control variables, and then try to use those few variables to control or predict the system's behavior. That's mostly what we are trained to do. Where we go wrong is in identifying very complex systems in real life that have too many variables to which this methods do not apply - like society, relationships, economy, stock picking, etc. In stock picking, the whole idea of fundamental or technical analysis is that we can decide the future movements of stocks if we just look hard enough at a few variables - like P/E, or Beta, or moving averages, or <put your favorite here> - but it's just not that simple a system.
Sunny I think this is a fantastic summary of what is at issue.

I am the son of an engineer, and yes, this is precisely how they think. To them, everything looks like a nuclear reactor (or even a hydro dam) with a bunch of control knobs.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by Valuethinker »

dbr wrote:I think my background and experience in engineering directs me against stock picking rather than toward it. I admit I have seen colleagues behave exactly as in the blog, but that baffles me. I have seen more of my colleagues who would not attempt to pick stocks. Maybe for me engineering was always hard enough that success never seemed that certain. I have a healthy respect for the world as it is rather than the world as we wish to think it is. Of course, that could also be that while working in what could be called engineering, my education has been in mathematics and theoretical physics (an observation that might seem to contradict the sentence just before this one, but, ah well).
There is a very funny book 'A Mathematician Plays the Market' by John Paulos. It is nothing short of very funny and insightful. He knows stock picking doesn't work but it chronicles his ups, downs, and final downfall with an investment in Worldcom stock.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by Valuethinker »

nukewerker wrote:Math has a small part in stock picking. It's useful in looking at stock history and current value but a very poor indicator of the future. Let's take the recent example of Tesco. WB owned a fairly large position. Anyone think he just closed his eyes and picked the stock? Or do you think he and his team of half a dozen or so spent at a minimum days, probably more like weeks or months even before jumping into the position? I'm guessing the latter. This is an isolated case but it could happen with any company at any time. With articles like the one below:

http://www.telegraph.co.uk/finance/news ... hammy.html

Now would be the ideal time to evaluate the possibility of a position. The curtain has been pulled back. I won't take a position because the company is based in the UK and I can't visit a store to see what it's all about but I think it's as good an example as any that math from an outside individual looking in is nothing more than speculation with numbers. Arguably an equally important task if not more important is to interview the management/visit the HQ as described by Buffett and Graham. A lot of times this is not practical but at a minimum in today's society one should be looking at HQ's on google maps and researching the owners before investing in any stock. Anyway I digress. But the reasons engineers are no better than someone with an art degree is that math plays such a small part in the market.
What the store visit would tell you is that some of the stores look quite tired, and that they are no longer price competitive with the rising stars: Aldi and Lidl (Netto has also launched a joint venture with J Sainsbury)- -the so called 'hard discounters'. And that all the majors (Sainsburys, Tesco, Wm Morrison, Asda (WalMart)) offer pretty similar ranges of stuff and they are all frantically trying to move from the edge of town superstores to smaller convenience formats on the High Street.

In other words, it's the problem from hell. Tescos has big overseas assets they could perhaps sell, but that also kills their future growth. But the value of Asia, Europe and Dun Humby (data mining loyalty cards) is perhaps equal to their current share price. So the UK business is in it for free. But cheap? Beware the falling knife.

I suspect there is a rights issue coming and/or a big dividend cut (ie -75% at the interims is matched at the finals, UK cos pay dividends twice yearly with a strong bias towards final dividend).

The HQ was always held to be an advantage on Sainsburys. Suburban office park rather than right in the centre of London, Holborn. However it's now seen as an independent fortress, part of what cut management off from what was going on at the store level.

With the rise of Aldi and Lidl the whole market is in a total mess, and it's hard to see what stops them getting say 20-30% of the UK grocery market (from 5% now) EXCEPT massive price wars fought by the majors.

Tesco was also running around buying restaurants, coffee shops etc to stick in their unused superstore space. Another distraction.

The seemingly unassailable market position has quite rapidly become very assailable.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by oragne lovre »

Sunny Sarkar wrote:...Where we go wrong is in identifying very complex systems in real life that have too many variables to which this methods do not apply - like ... relationships, economy, stock picking, etc. .
+101. And the best sentence of the best post on this thread!!!
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by Caduceus »

I don't think this applies only to engineers, but complex math is really not involved in most stock selection enterprises, so perhaps part of the(ir) mistake is thinking that the engineering or scientific process carries over to investing in an analogous manner.

I think the natural language of investing is accounting, with history and psychology as close cousins. Most of the greatest American investors would have been perplexed by the idea that math is paramount in investing. The background of some of the greatest investors is telling. Ben Graham was a classicist by training and for a time wanted to become a classics professor. Peter Lynch insisted on hiring history and psychology majors (and was himself a psychology graduate). John Templeton was a lawyer. Bill Gross majored in psychology in college. Charlie Munger studied math but trained as a lawyer and meteorologist.

I think value investors are good at synthesizing huge amounts of information and deciding what is important and what is not important. Although the information is garbed in accounting language, the actual analytical process is probably closer to the mental process of a political scientist curious about the factors leading to energy resource crises in Eastern Europe than it is to a physicist who's trying to plot how fruit flies utilize sensory feedback to modulate their flight paths. When you read so many analysts' reports on the same company, it can be striking how people who are presented with the same exact numbers will extract different narrative strengths and weaknesses. I think what makes Buffett so good at what he does is that he can zoom in on which numbers - and which story - among so many others, are truly the most important.

(Actually, are there famous investors who have had an engineering/science background? A quick search of Google's lists doesn't reveal any, but I'm sure there must be some.)
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by VictoriaF »

Caduceus wrote:(Actually, are there famous investors who have had an engineering/science background? A quick search of Google's lists doesn't reveal any, but I'm sure there must be some.)
Jim Otar is an engineer. And so am I.

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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by hiddensee »

D.E. Shaw.

But looking for a computational or mathematical investor who is personally famous in the banking industry today is like looking for a computational or mathematical engineer who is personally famous in the car industry. The people who made investment decisions/cars by gut instinct are long gone, and the financial, like automotive, engineering knowledge has been commodified. There is no competitive advantage in using undergraduate statistical techniques to analyse stocks because the institutional investors already have that knowledge, not because maths is dumb.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by investingdad »

I'm an engineer and I also picked up my MBA while I was still in my early 20s. I took some courses in derivatives, financial statement analysis, etc. I completed my MBA in 2000...right around the time the NASDAQ imploded, bringing everything else down with it.

When I started working in the mid 90s, I was investing in mutual funds. As I worked through my MBA, I went through the following two distinct phases:

- thought I knew enough to pick individual stocks
- this was quickly tempered by the .com meltdown
- realized I was smart enough to know that I lacked the time, talent, and experience to pick stocks

Fortunately, this personal epiphany only took about 18 months from start to finish and cost me less than one or two thousand dollars in trading losses in individual stocks.

But here's a data point, when the market took it's big .com dive, a senior engineering manager loudly announced that he had moved all his equity investments into bond funds to avoid future loses (this was after taking the initial hit). I imagine he missed the subsequent run-up and came out even further behind after all was said and done.

I didn't do anything because I really didn't know what to do, turned out to be the smartest play.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by nedsaid »

Caduceus wrote:I don't think this applies only to engineers, but complex math is really not involved in most stock selection enterprises, so perhaps part of the(ir) mistake is thinking that the engineering or scientific process carries over to investing in an analogous manner.

I think the natural language of investing is accounting, with history and psychology as close cousins. Most of the greatest American investors would have been perplexed by the idea that math is paramount in investing. The background of some of the greatest investors is telling. Ben Graham was a classicist by training and for a time wanted to become a classics professor. Peter Lynch insisted on hiring history and psychology majors (and was himself a psychology graduate). John Templeton was a lawyer. Bill Gross majored in psychology in college. Charlie Munger studied math but trained as a lawyer and meteorologist.

This backbencher in the House of Commons is shouting "hear, hear." Certainly, good math skills are very helpful to an investor but even a great Mathematician should admit that there are limitations to applying complex math to investing. It is like taking a complex formula and multiplying it by "H" which stands for "Human" and has a value of zero. The best of the complex formulas and algorithms probably work most of the time but the wild card of human behavior can reduce the value of these to zero in times of extremes in sentiment. Raw greed and raw panic can wreck the best investment models. Human emotion is very powerful and is to be respected.

I think value investors are good at synthesizing huge amounts of information and deciding what is important and what is not important. Although the information is garbed in accounting language, the actual analytical process is probably closer to the mental process of a political scientist curious about the factors leading to energy resource crises in Eastern Europe than it is to a physicist who's trying to plot how fruit flies utilize sensory feedback to modulate their flight paths. When you read so many analysts' reports on the same company, it can be striking how people who are presented with the same exact numbers will extract different narrative strengths and weaknesses. I think what makes Buffett so good at what he does is that he can zoom in on which numbers - and which story - among so many others, are truly the most important.

In my stock picking days, the numbers were important but what I was most interested in was the story or the narrative behind the company. What excites me about this stock, what stirs my animal spirits? Ultimately, purchasing a stock is a vote of confidence in a company's management, workforce, and the products and services it produces. There is a large intangible factor here.

(Actually, are there famous investors who have had an engineering/science background? A quick search of Google's lists doesn't reveal any, but I'm sure there must be some.)
I guess VictoriaF is a famous investor. At least around here. :happy :happy :happy
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by Leeraar »

I don't think engineers are much different than any other profession when it comes to investing. I've known and worked with many engineers (I am one myself), and have encountered all types, from day traders to under the mattress.

That said, some of my cohorts with engineering PhD degrees from Princeton ended up on Wall Street as "financial engineers" around 1980. This was because of their skill in "modeling", creating computer models to make short-term predictions from complex data. They did quite well.

Most older engineers I know are Boglehead-type "set it and forget it" investors.

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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by Clearly_Irrational »

Johno wrote:Somebody actually picking stocks, probably many fewer than 50, might be good at it, and thus have an advantage doing it.
The evidence suggests that's pretty unlikely over the long term.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by Johno »

Clearly_Irrational wrote:
Johno wrote:Somebody actually picking stocks, probably many fewer than 50, might be good at it, and thus have an advantage doing it.
The evidence suggests that's pretty unlikely over the long term.
The evidence IMO suggests it's true of a relatively small % of people, but is difficult to say it's unlikely for a given person. I think the foregoing sums about a lot of useless debate on this forum actually. It's fine to say what's true in aggregate, it's fine to say the poster in question doesn't think he or she is a good stock picker or it wouldn't be worth their time to try to learn to be one (I'd put myself in that category btw), but IMO kind of silly to tell other disembodied voices on the web they can't pick stocks. The evidence is actually fairly clear that some people can (might recall WSJ's long running 'stock pickers v darts' column, Wall Street stock pickers generally beat choosing stocks by darts thrown at the paper's stock listings), hard to say how many. And again we need to remember that DIYSP isn't paying anybody else, and the diversification argument has to be considered in the right context (ie again, people with 50% of their NW in a house, even if they claim 'it doesn't count' till they're blue in the face, are not necessarily more diversified than a DIYSP with reasonable stock diversification but less than than of an index fund, but who doesn't have 50% of their assets in one house). So back to my point which IMHO with due respect to all I don't think has been effectively countered: there's a tendency here to exaggerate how big an advantage indexers have over DIYSP'ers and the certainty of that advantage in any given case. Less cringeworthy overstatement would probably be made if people would just stick to 'I don't think that would work for me', rather than claiming it doesn't work for any particular other person.
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Clearly_Irrational
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by Clearly_Irrational »

Johno wrote:The evidence is actually fairly clear that some people can
I would actually suggest that this is not proven to exceed random chance.
hiddensee
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by hiddensee »

Also, Boglehead investing is essentially algorithmic. The algorithm may be so simple as to only require elementary school maths but it is certainly not based on gut feelings and intimate personal knowledge of business sectors - quite the contrary!
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by Caduceus »

But looking for a computational or mathematical investor who is personally famous in the banking industry today is like looking for a computational or mathematical engineer who is personally famous in the car industry. The people who made investment decisions/cars by gut instinct are long gone, and the financial, like automotive, engineering knowledge has been commodified. There is no competitive advantage in using undergraduate statistical techniques to analyse stocks because the institutional investors already have that knowledge, not because maths is dumb.
Great food for thought. I do think that it's important to acknowledge that there's a divide between quant-heavy and accounting-heavy perspectives to stock selection. If you're trying to dissect the assumptions behind IBM's pension scheme, or understand the foreign currency translation assumptions that Apple uses to consolidate its foreign subsidiaries, or compare Barnes and Noble's and Books-A-MIllion's cost flow assumptions for their inventory pricing ... you're not using mathematical algorithms or statistics. Sure, there's some math. Addition, subtraction, and occasionally multiplication and division. And yes, analysts will use, say, sensitivity analyses in their modeling. But the kind of knowledge and process that is being brought to bear in such an enterprise is not fundamentally mathematical or statistical logic but accounting logic.

What's interesting is the kind of "physics envy" that I think a lot of professions and academia in particular have suffered from, and which according to Roger Lowenstein was a big reason behind the initial success and the eventual failure of the mathematical geniuses behind Long Term Capital Management. In fields like political science, sociology and economics, and now finance, there seems to be this increasing sense that what we classify under the rubric of "math" is all-important. There's a heady mixture of fundamentalism (math is fundamental to everything), adoration (math is beautiful and logical), and disciplinary superiority (anything that cannot be quantified is a matter of gut, opinion or feeling). The Financial Times' and WSJ's coverage of Ina Drew's fall from grace after the trading scandal exposed intra-departmental conflicts precisely over old-fashioned forms of credit analysis and quantitative methods. Warren Buffet and Seth Klarman don't use computers. Berkshire Hathaway's replacements spend more time reading than crunching spreadsheets. So there are still plenty of people who don't equate a lack of faith in complex mathematics with gut instinct.

Perhaps they are just two different modes of approaching the problem of generating alpha, sort of the difference between a D.E. Shaw and a Baupost. But I can't help thinking that this idea that economic and financial reality can be modeled by people gifted in mathematics has had unforeseen consequences for markets, as when Wall Street started hiring Ph.ds in quant disciplines to create and trade complicated structured products that even their managers couldn't understand, or when LTCM took on massive amounts of leverage in putatively hedged positions based on what their models and numbers told them. In another few decades, I think historians will look back at this "quantitative turn" and weave it properly into our financial heritage.
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Re: Why do Engineers Think They’ll Be Good at Picking Stocks

Post by Clearly_Irrational »

Caduceus wrote:I think they both have a place, and perhaps they are just two different modes of approaching the problem of generating alpha
In my experience you get the best results when you do it both ways and compare. Cross checking is an incredibly powerful tool and I don't understand why so many don't seem to grasp that.
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