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The science of investing | BI

finance and investment:

While sometimes complicated, financial research provides many ground rules for how governments, companies, and even you should and shouldn’t invest.

knowledge of finances allows you to assess which investments may be profitable. Does that mean financial researchers are apt to tell you how to make the most money by investing?

Reading: Science of investing

The short answer is yes. Before looking at some examples, let’s quickly review what this fascinating and confusing field is all about.

investing is about risk and return

many may still associate the word finance with the stereotypical wall street broker, but the truth is that this is a fairly small part of what this field is all about. the scope of finance is broad, especially when it comes to its investment subset.

an investment can be as simple as saving a certain amount of money each month, but instead of depositing it in your savings account, you put it in an index fund. the bank will place the money in funds that it considers safe, but with a little more risk than if you had chosen to keep the money in your account. in return, you can get higher returns for what you invested.

what is the best strategy?

As we have seen, investing is about risk and return. however, the key is knowing how to best manage the capital you have available, and the more money that is at stake, the more critical it becomes to apply the science behind it all. therefore, researchers are studying the advantages and disadvantages of various investment strategies.

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Unlike investing in index funds, an active investment strategy involves outperforming benchmark indices over time using your own research. At the extreme end of this scale, we have investors who go to great lengths to ensure that their investments will be in safe hands well into the future. These investors buy shares of a company with the intention of gaining control and influencing management decisions.

researchers Øyvind norli, charlotte Østergård and ibolya schindele have studied this group. the findings were that these investors generally select companies in which it is easy to buy shares. On average, they bought 9 percent of the companies’ shares before they used their ownership for influence, and they earned an average of 8.5 percent for the capital they had invested.

In short, active investing can potentially achieve higher returns, but it requires more resources and is therefore more expensive.

citizens are also investors

The Norwegian Government Pension Fund, or the Norwegian Oil Fund, manages revenues from Norway’s oil and gas resources so that this wealth benefits current and future generations. It’s not uncommon for governments to make various investments to ensure future growth, but the fact that the fund is the largest of its kind in the world creates a need for especially close oversight.

In this sense, financial investigators play an important role in scrutinizing decisions that are made on behalf of Norwegian citizens, but are not understood by most people. The name of the organization that makes these decisions is norges bank investment management (nbim). In 2015, Professor Richard Priestley criticized NBIM’s management and investment strategies for taking on too much risk.

After extensive examination, Priestley and other researchers concluded that a practice described as “gambling” was causing an annual loss of NOK 9 billion. with updated data in 2017 and 2019, the researchers were still not happy with what they found. after deducting costs, the fund was still losing billions from its active investment strategy compared to what it would have earned by investing in index funds.

at the crossroads

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associate professor espen henriksen has also been closely following the oil fund’s strategy. when a committee appointed by norway’s finance ministry in 2017 recommended separating the oil fund from norway’s central bank, he expressed concern about it. the professor was concerned that the new organization would lead to a greater focus on business practices that involved greater risk taking. When the government considered whether the fund should invest in unlisted stocks in 2018, he was equally critical for the same reasons.

the question henriksen raised was whether the fund was suitable for this type of operation. According to the researcher, the oil fund had been following a specific success formula until then: it had obtained its profits by sharing the global risk through investments spread over several index funds. one of his main arguments against more active investment was that private companies would be better equipped to compete in the marketplace. Therefore, Norway would lose money with such a long-term strategy.

investment in times of crisis

It’s one thing to invest, but when should you buy and when should you sell stocks? the perfect answer doesn’t exist unless you can predict the future. however, financial theory can still teach you a lot about what to do in particularly uncertain times.

henriksen explains that the question to ask is what happens to your stock if the news in the coming weeks is worse than expected? could your finances bring more bad news?

If you think bad news will weaken your ability to take risks and that you could easily be worse off than everyone else, the most likely answer is that you should sell the stock you’re sitting on. If stocks crash, it’s best that the value of the rest of your savings doesn’t go down at the same time.

On the other hand, if you think more bad news won’t have much of an impact on your earnings and you’re better off taking more risk than the average investor, you may want to consider holding the stock. or buying more. At best, he stands to reap rewards because the premium for taking risks in the stock market has increased. if you lose money in the short term, at least you can bear it. a third alternative is to follow evergreen’s advice to sit quietly in the boat.

See also: What Is Earnings Season? – Forbes Advisor

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