228 THE INTUITIVE INVESTOR
equipment, that allowed scientists to discover the shortcomings of
Newton’s laws when applied to this micro world.
Similarly, “classical” investors, in the days before computers
could crunch through reams of data and provide mind-numbingly
detailed analyses, believed that earnings (when properly defined)
explained stock price movements. T. Rowe Price stated that “the
earnings factor, in the long run, determines the investment value of
a share in a business” (quoted in Ellis, Classics). Of course, he’s
largely right. At the macro level—which in this analogy means a
longer time frame—earnings do drive stock prices; as shown in a
working paper by Easton, Harris, and Ohlson (Nov. 1989), the
variance in earnings explains 63 percent of the variance in stock
price movements. However, the same study shows that, at the micro
level (i.e., less than one year), earnings explain less than 3 percent
of the movement in stock prices. Thus, in both investing and phys-
ics, different forces seem to be operating at the macro and micro
levels.
These differences have led practitioners in both disciplines to
ever-greater efforts to unite their findings into one “unified” theory.
This grand theory would presumably explain all behavior on all
levels. As I was pondering these issues, during cocktails at a quan-
titative methods conference, one of the presenters was agonizing
over this very point, lamenting that he might have to go back to
school to get still more education in quantitative methods so that
he could “crack the code” in investing. Underlying his angst was
the clear belief that the stock market was orderly and law-abiding.
At this point in the conversation, I mentioned some of the simi-
larities between physics and investing (the ones I just described)
and suggested that possibly there is no single solution to the invest-
ment riddle. A latecomer to the discussion interjected that this issue
was, in fact, the critical distinction between physics and investing:
Because physics is a natural science, there are answers (though
scientists may never uncover them). In contrast, investing is not an
exact science, and therefore it does not have “final” answers. In-26-29 ware 228 1/19/01, 1:19 PM