Du'ers who have degrees or advanced degrees in math, do you think that

[raccoon]

your math background helps you be a better investor? Because you can calculate things like
average annual rate of return and perhaps can detect if someone else's figures are miscalculated?

[Dawgs]

1. No. I think my patience makes me a better investor.

My math degree doesn't help one bit.

[phantom power]

2. I don't generally cross-check that sort of thing, however...

I think my math background helps me because I have an intuition about exponential functions, and how they can either work for you or against you in various financial situations. Like, compounding interest on debt is an exponential function working against you, while compounding returns on investment are exponential function working for you.

I have a feel for how exponential functions behave because I've studied them in various contexts. I think most people have no intuitions about them whatsoever, and it causes people to not understand the implications of some decisions.

Also, I think having an understanding of scale-free distributions as applied to market behavior and black swan events gives one a sense of -- well... perspective on what is possible. Lots of people I think genuinely just consider Big Bad Events as impossible.

And, I suppose a mathematical understanding of what risk/payoff matrixes are, how to use them to make sense of investing/retirement decisions, etc.

It's not exactly that I actually go and do math on this stuff, it's more that when I'm working with our financial advisor I have some intuitions about what's going on and what I'm really doing when I make predictions.

[pnwmom]

3. Math PhD's developed the algorithms for the derivatives that crashed the economy.

So a math degree will do you little good without common sense.

And if you do have basic intelligence and common sense, you could use a calculator to check someone else's figures.

[no_hypocrisy]

4. Doesn't the impact of insider information corrupt the variables to some degree?

Meaning no matter how you use statistics and other formulas of probability as well as a well-researched portfolio, aren't those numbers compromised if a group of investors are buying to increase the value of a stock, only to short it to get profits?

[Egalitarian Thug]

5. No, but it really helps in identifying a scam. n/t

[HereSince1628]

6. People who read, people who understand qrtly reports, and people who can calculate fair market price

Last edited Wed Jun 13, 2012, 05:19 PM - Edit history (1)

do better on average. Earnings are generally reported, you don't need to know any arithmetic to find them.

Of course most of what is available to read is shit, and many quarterly reports hedge the truth. And calculating fair market price requires either an educated or a wild-ass guess at future earnings. Well, to be fair, future earnings are typically a combination of educated and wild-ass guesses. I say wild-ass because these speculations include knowing how a company is expected to do against other companies in its sector, and how it will be affected by the financial environment during the investment period--things which depend on information which is often bounded by large uncertainty.

[laundry_queen]

8. Agreed.

My corporate finance prof said the best way to really tell if a company is doing well is to read the financial reports from beginning to end, and concentrate on the disclosure comments (some companies have dozens of pages of them, and many investors ignore them). Companies hide a lot of "yeah we are showing ten million in recognized revenue here BUT...." comments at the back.

As you said - a lot of those 'complicated' (they aren't really) equations that are used to project future growth are based on estimates that are also calculated with other equations and other estimates. One estimate is a bit wrong, and those exponential equations go the wrong way, fast. There is a movie I saw (Margin call) that is supposed to be loosely based on the collapse of Lehman Brothers, and that's what it rests on - some employee who is actually a math whiz discovers that their estimate is off and thus they are actually crashing months ahead of schedule (they knew they were in trouble already) and they are carrying far to many toxic assets, but by then it's too late to get rid of them. Anyhow.

So I personally don't think you need to be a huge math whiz, but a little bit of accounting knowledge and a penchant for being thorough with moderate math skills is probably your best bet.

[HereSince1628]

10. Looks simple...Price (current) /Earnings (last x period) * (estimated fut earnings)= fut. est. price

But there is a lot of uncertainty stuffed into estimated future earnings as well as the current price. If the company has been dodgy about earnings or expected earnings (and it seems they usually ARE), or if the current price is riding a bubble, then all the arithmetic doesn't do you much good.

[lastlib]

7. A math degree isn't essential, per se....

...but it certainly helps me to have a background in math. Investment rarely involves integral calculus or differential equations, but having an understanding of exponential functions to calculate future values, market correlations, geometric averages, etc., can certainly help you grasp how investments work for you. A good statistics course will give an investor many of the tools needed to get a handle on this stuff.

Granted, in more advanced areas of investments, there are some calculations that are more akin to particle phyiscs, but the typical investor isn't going to need to employ it. If you're developing binary option pricing strategy, you're probably working for an institutional investor anyway, and have access to the computer/mathematical tools to do it. Average Joe ain't gonna be doing that.

If you need a good book on sthe subject of investment math, try "Quantitative Methods For Investment Analysis" by DeFusco & McLeavey. It's admittedly a pretty heady work, a college-level textbook, but it can give you all the tools you need for the job.

[TlalocW]

9. Not for me

My math degree was gotten in conjunction with a physics degree so most of it was either for those kinds of problems or the useless-in-the-real-world pure math.

TlalocW