Does A Highly Creative or Artistic Personality Help Or Hurt In Investing?

This blog was inspired by Sean Iddings' article "Investing Is An Art, Not A Science" published this morning on the MicroCapClub website. You can read the article here.

The article opens with the Peter Lynch quote:

"Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage."

I was a full time artist and writer for twenty-five years and pretty successful at it. In my peak year I sold over $1 million in my art and related poetry and prose. I've slowly made a transition to full time investing over the last five years. I’ve often wondered if there was a connection between artistic inclination and investing. I’ve known some extremely successful investors and none seem to have the slightest artistic inclination or imagination. I’ve wondered to what extent I need to guard against my creative impulses in investing.

My conclusion: other than to a minor extent, my artistic inclinations are more a hindrance than a help in investing. I have developed computer software that crunches the numbers on hundreds of companies a week, a project that took me years to develop, and the process of experimentation with what to emphasize, for instance latest quarter versus prior year quarter, or latest twelve months versus prior twelve months, or last five years versus prior five, well, I think there was an artistic element to that. Much of art is about emphasis in a unique way.

But in general the artistic mentality is one of constant experimentation and evolution, and investing is a business of cold analysis, and stability. I’m very good at analysis; I’m not particularly stable. So I’ve tried to develop habits and an analytical approach that protects me from myself, that makes 90% of the decision based on the numbers. And forces me to stick with the outcome of my research, that doesn’t allow me to trade based on a whim, because I get whims every single day.

As far as the Peter Lynch quote, my take is that some companies led themselves to analysis based on the numbers, and some don’t. Coca Cola does. Visa does. Amazon does not. The more stable, the more profound the competitive advantage of a company, the more that analysis based on the numbers is valid. The more volatile, uncertain, the weaker the competitive advantage or “moat,” the more a company is in transition to becoming something else, the less valid the current numbers. 

Amazon, for instance, takes most of its money and invests it in projects that won’t generate real returns for years, often many years, down the road. And they have a lot of debt, exposing them to macro developments that are essentially unpredictable. I recently ran the numbers on it, and I think the average PE over the last ten years was something like 500. In other words, to take a long term position in Amazon (as opposed to trade in and out) based on research you need to have an opinion on how worthwhile those investments in the distant future will be. That’s qualitative, not quantitative, analysis. Number crunching doesn’t help.

Sustainable competitive advantage is actually very rare. No more than five percent of public companies have them, and no more than one percent have a true advantage that results in extremely high, sustainable profitability. Number crunching can help you find competitive advantage, assess competitive advantage where it exists. It can't help you figure out where a company is going that doesn't have one, and it is of questionable value in the analysis of a company with a competitive advantage in the early stages of formation, which is what my computer model originally was designed to uncover.