Saturday, March 31, 2001

Uncertain rewards

It's always better to invest in a basket of stocks than in the one great stock. Any fall will never be as hard.
Gautam Chikermane
THERE IS a principle of physics discovered by Werner Heisenberg (1901-1976), best known as the founder of quantum mechanics, that demonstrated that certain pairs of variables cannot be measured together. Specifically, in a 1927 paper, just five years before he received a Nobel Prize for physics in 1932, Heisenberg concluded that the more precisely one determines a sub-atomic particle’s (electron, for instance) position, the less precisely can one determine its momentum. A forecast of the particle’s trajectory is, therefore, subject to an unavoidable inaccuracy. This is called Heisenberg’s Uncertainty Principle.
This ‘unavoidable inaccuracy’ reflects itself on the stock markets, too. There is no certainty that just because a company has been performing consistently well, it will continue to do so. There is no certainty that an undervalued stock will not remain undervalued forever. There is no certainty that a mutual fund that has generated decent returns in the past will continue to do so in the future–that’s the reason why securities regulators the world over have funds publish this statement in their prospectuses: "All mutual funds and securities investments are subject to market risks and there is no assurance and no guarantee that the fund’s objectives will be achieved."
Opinion in Outlook Money

No comments: