Philosophy - always a wise investment

PUBLISHED : Thursday, 20 September, 2007, 12:00am
UPDATED : Thursday, 20 September, 2007, 12:00am

As the oft-quoted saying of economist John Maynard Keynes goes, 'Practical men who believe themselves to be quite exempt from any intellectual influences are usually the slaves of some defunct economist'. Something similar may be said of ordinary retail investors, who might think their sole purpose and meaning in life is to make money, but are actually under the influence of some defunct philosophies.

Arcane metaphysics may be the last thing on the mind of a stock speculator. But it is striking how two of the most widely held investment doctrines resemble two influential philosophical schools of thought.

Value investing - the investment theory most popularly associated with stock market gurus Benjamin Graham and Warren Buffett, with its emphasis on intrinsic value - sounds a lot like a philosophical school known as realism.

Its opposite is pure speculation, the one to which most Hong Kong investors probably subscribe. But even naked, unthinking greed - the belief that money is to be made in the shortest time by offloading inflated assets on someone more stupid - still believes in something. It denies there is such a thing as intrinsic value; or if there is, who cares? The denial of intrinsic reality - and its sister belief, that it is unknowable even if it exists - is a common feature of several diverse, even contradictory, doctrines that fall under the umbrella term postmodernism.

A philosophical comparison is not completely idle or absurd. If you examine some buried or hidden philosophical assumptions or biases that lurk behind some dark corners of investment strategies, they will have some influence on your buy/sell decisions, for better or worse.

Now back to the (metaphysical) school. Realist philosophers, from Aristotle to Bertrand Russell in the early phase of his development, believe there is an underlying reality - substances that underpin all appearances or phenomena. Philosophical analysis is the method to unearth the nuggets of gold (realities) that underpin appearances.

Similarly, fundamentalists - followers of Graham and Mr Buffett - believe the fundamentals of a public company underpin the intrinsic worth of its shares, its true price as opposed to its market price.

Discounting, or discounted cash-flow analysis - essentially a reverse of the compound-interest formula - is used to calculate the present value of all an investment's future profits.

Keynes, however, thought all these ideas were nonsense backed by pseudo-mathematics. The only thing certain about the future, according to the great economist, is uncertainty and unpredictability. But any discounting model involves projecting earning prospects and dividend payments far into the future, based on past performances. Investment is not history - the past is no guide to the future.

A whole chapter from his influential classic, The General Theory of Employment, Interest and Money, is devoted to defending pure naked speculation. The only thing an investor can reasonably 'guesstimate', says Keynes, is how other investors will valuate a particular asset or asset class in the near future. Hence his famous saying that the winner in a beauty pageant is not determined by her intrinsic looks, but how judges rate her looks. The whole game is about investors trying to out-guess each other.

Keynes' position is exactly what a postmodernist would hold. Everything is surfaces and appearances. There are no underlying realities or fundamentals, and no such things as true worth or intrinsic values. Truth is a fiction invented by metaphysics. Value is the market price, which can be HK$10 one day and HK$100 the next.

I don't know if the unexamined life is really not worth living, but in our turbulent, red-hot market, it may be worthwhile stepping back a little, taking it easy and thinking philosophically about what you're doing. It may save you from serious losses.

Alex Lo is a senior writer at the Post