nizes that interaction is critical to the understanding of physical
reality. “Material objects are not distinct entities, but are insepa-
rably linked to their environment;... [T]heir properties [must] be
understood in terms of this interaction with the rest of the world,”
writes Fritz Capra in The Tao of Physics (Bantam 1975).
Risk and return offer another parallel between investing and
physics. Until Sharpe formalized the relation between risk and return
in the Capital Asset Pricing Model (CAPM), relatively little atten-
tion was paid to these Siamese twins of investing. Consider this
dictum from T. Rowe Price, a legend in growth-stock investing:
“We believe that it [growth-stock investing] is the soundest and
safest plan for the average investor.” Price suggested that stocks
with the longest duration (i.e., low dividends, high growth) and
highest betas were the safest investments, which is clearly not the
accepted view today. In defense of T. Rowe Price, at least he in-
cluded risk in his investment philosophy; many of the investment
practitioners in the 1950s and before ignored the subject altogether,
overlooking the profound truth, as stated by Charlie Ellis, that “in
the investment game, risk and return are inseparable” (Classics,
1989).
In physics, the relation between time and space was largely
ignored or, at best, misunderstood. Then Einstein’s theories showed
that “space and time are treated on an equal footing and connected
inseparably. In relativistic physics, we can never talk about space
without talking about time and vice-versa” (Capra, The Tao of
Physics).
Another similarity between the two disciplines is the distinc-
tion between “micro” and “macro” truths. At the macro level,
Newton’s laws of classical physics, which reduce all phenomena to
the motions and interactions of hard, indestructible atoms, suc-
cessfully explained the world as we knew it—that is, events such
as falling apples. Classical physics began to crumble only when
scientists started exploring the micro world inside the atom. In part,
it was technological progress, in the form of more sophisticatedQuantum Investing 22726-29 ware 227 1/19/01, 1:19 PM