Posted By: Admin
Normally you would expect that to be good at investments, one must be smart in reading financials, must be a great analyst and generally good in commerce and numbers. While in most cases the above is true. Being a student of science and especially the knowledge of Physics can be very useful in making investment decisions as well.
Today I am going to talk about two concepts in physics and how they relate to the investment world.
Gravity is a force which tries to pull two objects towards each other. Anything which has mass also has a gravitational pull. On earth, Gravity is what gives you weight. It is the force that pulls on all of the mass in your body towards the ground. Throw a ball in the air, it is pulled back to the ground. You need extraordinary powers and precision to engineer a rocket or an airplane to control this force and keep you in the air. Precise engineering is needed to keep you on air.
In the investment world, there are times, when all the stocks good, the bad & the ugly go up.. irrespective of their performance, pedigree, governance, competitiveness etc. There are various factors leading to this liquidity being one among them. But you must remember not every company deserves a high price, only a chosen few have great precision and engineering that enable them to stay afloat, the rest would sink to a new low once the reality sets in. So remember esp in exuberant times that gravity is at work and the fundamentally unsound companies will come crashing down in due course of time. So make sure that your investments are in the best of the companies or Mutual Funds that invest in such companies.
Now for the second principle of Physics,
Buoyancy is the tendency of an object to float in a fluid. All liquids and gases in the presence of gravity exert an upward force known as the buoyant force on any object immersed in them. Example, fill a small balloon with air and immerse it in a bucket of water… you will find it difficult to keep it down, you may succeed for a limited time, but eventually it is the balloon with the air within that will win over you. Buoyancy is the tendency to rise to the surface of water, whenever an object filled with air is immersed.
From an investing context. You may do a lot of research on a particular stock/ mutual fund and invest in it after ensuring that it is of great value in your portfolio. It so happens immediately after you invest, a global event or a Geopolitical event plays out and the entire stock market is down significantly . What happens to this investment you have just made ? Will it also go down ?
Of Course it will. When the market trend is significantly down, individual stocks cannot move in the opposite direction and will also follow suit and go below. But if the fundamentals of the stock or the fund are good, then like the balloon with air, it will eventually rise and go up beyond the surface of water. But you may need to give it time for the market to recognize the value.
So whenever you are faced with market volatility impacting your portfolio remember Gravity and Buoyancy, am sure they will do you good in making portfolio decisions.