Why more investors aren't millionaires and more engineers aren't innovators

June 17, 2014
Every once in a while you'll find commentary in the finanical community that has insights applying equally well to other areas. That is the case for a recent essay in Barron's. Stephen Mauzy, an equity analyst at Wyatt Investment Research, was trying to explain why many professional investors have lousy track records making investments. He claims that most explanations of this phenomenon miss a key point: that investing is entrepreneurial.

Every once in a while you'll find commentary in the finanical community that has insights applying equally well to other areas. That is the case for a recent essay in Barron's. Stephen Mauzy, an equity analyst at Wyatt Investment Research, was trying to explain why many professional investors have lousy track records making investments. He claims that most explanations of this phenomenon miss a key point: that investing is entrepreneurial.

"....investing is an exercise in search and discovery, or what Israel Kirzner, a leading economist on entrepreneurship, refers to as 'alertness,'" Mauzy says. "Most investors, and most people, in fact, are more obtuse than alert. Most are lousy entrepreneurs, so most are lousy investors," he continues. 

I'd claim that Mauzy has accidentally hit on the nature of not just good investing, but also of good engineering. Substitute the words 'engineering' and engineers' for 'investing' and 'investors' in what he says. It all still applies.

The nature of investing has changed over the years, as has the nature of engineering. A classic investment text called Security Analysis laid out rules for investing that have become widely followed. In a nutshell, the rules guide the way toward finding companies having an intrinsic value higher than what their stock price reflects.

But Mauzy points out these rules no longer provide much of a competitive advantage. When the book was written in the 1930s, investors had to do a lot of digging and manual calculations to figure out whether companies were under valued. Today, anyone can do the analysis on a number of free web sites with the push of a button. 

You might argue that engineering has gone down a similar path. Eighty years ago, someone who took the time to carefully calculate loads and forces had a leg up on practitioners who just used rules of thumb. Today, engineering analysis, at least for straightforward problems, is all but free. 

But still, most professional investors have unexceptional investment returns. The reason why may be that "Exceptional returns are the outcome of an alert, curious, unquantified mind," says Mauzy. "Most M.B.A. courses and nearly all CFA lessons are inculcations of formulas. They instill no competitive advantage," he goes on.

And here you have in a nutshell why projects run by college-educated engineers may produce outcomes that are fairly ordinary rather than innovative. Engineering schools are good at teaching formulas. They are less successful at cultivating alert and curious minds.

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