Do You Have to Be Good at Maths to Invest?

Being very good at maths is required for several investment fields. But none of these endeavours would seem to matter to the long-term investor

John Rekenthaler 6 February, 2017 | 10:00AM
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Famously, Sir Isaac Newton lost nearly his entire net worth, £20,000 pounds, equivalent to about £3 million in today’s money, investing in one of the earliest stocks available. The South Sea Company was granted a monopoly by the British Crown in trade with Spanish South America in exchange for assuming the country’s war debt. Newton profited initially but kept buying on the way up, as the stock appreciated sharply, which cost him dearly when the shares collapsed to their original price.

Newton’s response, “I can calculate the motions of heavenly bodies, but not the madness of men,” tells half the story. Yes, investor irrationality does not lend itself to mathematics. Newton could not measure the temporary sanity of those who bought South Seas shares. But his maths challenge went deeper than that. He also had no tools with which to gauge South Sea’s business prospects. The calculus solves many problems, but not that of estimating how much trade will be generated with the colonies of an opposing superpower.

Thus, he could just as well have said, “I can calculate the motions of heavenly bodies, but not the profits of emerging ventures.” In other words, Newton would have been no better than the rest of us at understanding how Apple will fare under Tim Cook.

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John Rekenthaler

John Rekenthaler  John Rekenthaler is vice president of research for Morningstar.