The Art and Science of Investing

Valuing a business is part art and part science.

Warren Buffett

2025 was the third consecutive year of strong returns for the S&P 500 index and the sixth strong year of the past seven. (The only challenging year during this period was 2022, with the index declining 18.1% as the Federal Reserve fought rapidly rising inflation with higher interest rates.) For equity investors owning the index, this seven-year period was financially rewarding, with compounded annual growth of 17.3% – significantly higher than the average annual return over the past 100 years.

However, we don’t have to look back too far in time to remember ”the lost decade” from 2000 through 2009. During this period, the index declined cumulatively by 9.1%, or a compounded rate of 0.95% per year – meaning $10,000 invested in the S&P 500 on 1/1/2000 was worth only $9,090 10 years later. Clearly, looking back over many decades, the stock market oscillates between prolonged periods of very attractive returns for investors and unproductive periods of negative returns.

Unfortunately, no one can consistently predict what lies ahead, whether good times  or tough times. In response, many investors have concocted a variety of strategies to try to invest successfully in an unpredictable world. Underlying the many different  equity investment strategies utilized by investors today is an inherent debate on  whether successful investing is driven more by science or by art.

Defining the Debate

One side of the debate argues that successful equity investing is largely a science driven by quantitative analysis. In this world, decision-making is a result mostly of analysis of financial statements, valuation measures, strict formulas, and financial modeling that is applied rigidly.

The other side argues that investing is largely an art driven by qualitative analysis. In this worldview, understanding people, competitive dynamics, and how the world is  changing matters more than what can be captured in a spreadsheet. Decisionmaking is based more on creativity, imagination, intuition, and out-of-the-box thinking.

Most investment strategies are based on a belief in one side or the other, or a combination of the two.

We often turn to the writings of Benjamin Graham for his investment wisdom on questions like this. In 1937, he wrote in “The Interpretati on of Financial Statements” that “common stock selecti on is a difficult art – naturally, since it offers large rewards for success. It requires a skillful mental balance between the facts of the past and the possibilities of the future.” Decades later, legendary investor Peter Lynch wrote in “Beating the Street” that “stock picking is both an art and a science, but too much of either is a dangerous thing.” Both of these famed investors believed that successful investing involves both art and science, and we strongly agree. Further, we think the best long-term investment results come from the combination of the two.

Science: Quantitative Analysis

The science aspect of equity investing begins with historical facts: analyzing past financial statements of a business and the trends they have shown over time. This analysis helps in understanding past growth rates of revenues and profits, how profitable and financially strong a company is, the cash flow it generates, and how its financial metrics compare to other companies it competes with. This can all be quantitatively measured and verified, and this analysis is then used to extrapolate results into the future.

This strategy works well in understanding how a business achieved its current  status – but the limits are real. Financial statements largely describe the past and  present. Even the best analysis can’t fully capture how a business will evolve, 
how a competitive landscape will shift, or how a new technology will reshape an  industry. The future rarely arrives as a neat extension of the past. Writer Morgan  Housel captured this tension well on his “Collaborative Fund” blog: “Measuring what worked in the past is a science. Understanding why things are different now is an art.”

“The art of investing is not guesswork – it is disciplined judgment applied to an uncertain future.”

Art: The Qualitative Nature of an Uncertain Future

A thorough study of past results of a company is an important and necessary part of our investment strategy. However, it doesn’t answer the most important question:  What is likely to be true in the years ahead? Since we invest with the perspective of a long-term business owner, a forward-looking approach is the most important part  of our investment process. Cultivating an informed opinion of how well a company might perform five or 10 years into the future requires a different set of skills than numbers crunching and doesn’t fit neatly into a model. We believe this is the part of  investing more akin to art than science.

The first and most important determination we must make is on the strength and  durability of a company’s business model for years into the future. We must decide  how well a company can withstand all the competitive threats it will likely face as  well as its sturdiness in the face of external shocks like recessions, pandemics, or  wars. Since it is impossible to consistently predict the future accurately, we must  think more in terms of a range of possibilities. There is no formula to help perform  this analysis, so we must use our own judgment and intuition based on all available  facts and our experience studying all kinds of businesses over many years. Ultimately, we seek to find business models that both benefit from secular tailwinds  and that are strong enough to prosper through a variety of different sets of industry  and macroeconomic circumstances.

We must also evaluate the company’s leadership. The world today is changing more rapidly than ever, driven by AI and other technological advances – which is why a  talented CEO is more important than ever. Talented leadership in this turbulent world can help position a company for success while other businesses with less  killed leadership are left behind. There are no quantitative formulas for judging the intelligence, energy, and integrity of a leader, and we again must use intuition and judgment. If our assessment of a talented leader is correct, it can lead to compounded returns that far exceed anything we had in mind at the time of our  initial investment. We spend an inordinate amount of our research time and effort on identifying great leaders for this very reason.

Combining Science and Art

In our experience, it can be easy to lean too far toward one of the extremes.  Leaning too heavily on science can create false precision and the belief that if  something can be modeled, it can be known with certainty. Leaning too heavily on  art can create an overreliance on narratives and the belief that if a story is  persuasive enough, it must be true. Both can lead to poor outcomes, especially during periods of rapid change.

We believe a successful investment strategy needs both art and science. Science  can ground us in reality and help us identify companies that have been very  attractive investments in the past. But identifying which companies will be great  investments in the future is more of an art. To be clear, the art of investing 
is not guesswork – it is disciplined judgment applied to an uncertain future. With the profound pace of change that our world is experiencing, we work constantly in our attempts to select investments for you that will be successful for many years to  come. It is not an easy task, but we are working hard on it each and every day. Legendary value investor Seth Klarman summed it up well in an Outstanding Investor Digest article when he stated that “it is important to remember that value investing is not a perfect science. Rather it is an art, with an ongoing need for  judgement, refinement, patience, and reflection.”

As we begin a new year, we deeply appreciate the trust you, our clients, place in us. It is your trust that motivates us to work diligently on your behalf with a goal of  delivering attractive longterm results along with a high level of professionalism. We  wish you all a healthy and happy year in 2026!