# Math, Physics, & Investing

Some useful principles for an investor that happen to come from math and physics (each mentioned in previous posts).

1) Enrico Fermi - Believed the ability to effectively estimate was an important skill for physicists. A good way to solve physics, and other difficult problems, was by coming up with simple, approximate, but meaningful estimates (over precise calculations) to verify if he was on the right track. After that is done well, that one could later decide if a bigger effort to measure something with more precision was warranted.

Fermi was known for his ability to make good approximate calculations with little or no actual data, hence the name. One well-documented example is his estimate of the strength of the atomic bomb detonated at the Trinity test, based on the distance traveled by pieces of paper dropped from his hand during the blast. Fermi's estimate of 10 kilotons of TNT was remarkably close to the now-accepted value of around 20 kilotons. - Wikipedia

In investing, becoming good at making quick, meaningful, approximations (of valuation, market size etc.) using simple assumptions is more important than complex spreadsheet analysis. If you need a spreadsheet to see a mispricing then you shouldn't be buying it. The mispricing should be plainly obvious.

2) Richard Feynman

"The first principle is you must not fool yourself, and you are the easiest person to fool." - Richard Feynman

Whether aware of it or not, shortcuts we have in our mental wiring cause misjudgments.

...heuristics are simple, efficient rules, hard-coded by evolutionary processes or learned, which have been proposed to explain how people make decisions, come to judgments, and solve problems, typically when facing complex problems or incomplete information. These rules work well under most circumstances, but in certain cases lead to systematic errors or cognitive biases. - Wikipedia

These shortcuts often cause the misjudgment of an investment's potential and risks. This is especially true AFTER the commitment of dollars. Once you've made a purchase, the tendency is to seek information that confirms the wisdom of that action. To counteract this, spend more time and energy thinking about why the investment thesis may be wrong instead of looking for confirming information.

"If you want to avoid irrationality, it helps to understand the quirks in our own mental wiring..." - Charlie Munger

3) Kurt Godel - Showed that any system of mathematics complex enough to contain basic arithmetic must always be either inconsistent or incomplete. His incompleteness theorems are similar to the liar paradox.

"Life is interesting with some paradox. When I run into a paradox, I think either I'm a total horse's ass to have gotten to this point, or I'm fruitfully near the edge of my discipline. It adds excitement to life to wonder which it is."

So even the simplest systems have paradox. If the simple ones have it, you can be pretty sure the more complex stuff does. Occasionally, you will find an investment surrounded by contradiction, paradox or what is just generally counterintuitive.

This should not deter further investigation since the confusion caused can sometimes help an asset become mispriced.

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Math, Physics, & Investing
Reviewed by jembe
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