Math is a Foundation, Not an Edge

Did you watch the Olympics this summer?  I did a little bit.  And I’ll tell you something very important – no matter which athlete won gold, silver or bronze in each of the hundreds of events, every single one of them had the basic fundamentals of their sport down pat.  Thousands of hours and years of practice. That’s the foundation these kids have, that’s what puts them on the field of play to begin with. The basic skills required to compete are not an edge, every long jumper and swimmer and diver and basketball player at the games has them.

The same could be said for understanding the basic math underlying securities valuation and portfolio construction. All professional investors worth speaking of have these basic foundations, this understanding of the math involved in stock selection and allocation.  Whether they reach the best conclusions or actually put these mathematical understandings to rigorous use is not the same thing – the world is filled with intelligent people who are lazy.

I bring this up because I put up a throwaway post the other day called Math is Not an Edge and everyone got really mad about it.  Especially Robert Seawright, one of my fave financial bloggers, who disagrees.  He says that math is, in fact, an edge.

Let me give you three reasons I still believe I am right:

1.  Back in the day, investors would flip through their Value Line booklets and pore over SEC filings for the very basic details about company fundamentals that are now freely available on hundreds of different financial websites and apps.  You cannot argue that this is edge-producing math.  You could say that the interpretation of how this data will affect a stock’s future price is your edge, but that is NOT MATH, it is ANALYSIS.  Not the same thing.

2. The main reason so many of you have argued with me is based on a misunderstanding – I am not saying the math doesn’t matter, I am saying math is not an edge in and if itself because it is the starting point and the commonality between most experienced investors is that they all understand it.  Again, it is the foundation.

3.  You know who was really good at math?  This fucking idiot.  Probably better at math than you are. Again, he has the foundation in that he knows all the calculations and ratios that everyone else knows.  But that was not his edge.

So I say again, once we all agree on the math – then it’s time to tell me something I don’t know.

Read Also:

Math isn’t an Edge (TRB)

Math is a Major Edge (Above the Market)