Quantum Mechanics and Investing

Physics was not an easy course for me, and although I got an A (one of very few) I must admit I don’t remember studying quantum mechanics in school. Perhaps it had not yet been discovered – way back then.

Quantum mechanics has something to do with really, really small particles – smaller than atoms. Apparently there are some things that are so small and hard to study, that merely the act of observing them changes them into something else. Pretty far out stuff. Please don’t ask me to explain it, because I can’t.

But I do know that investing has a dose of quantum mechanics, and a good \n\texample of it occurred this summer.

For as long as I remember, a favorite Wall Street saying was \n\t“Sell in May, and go away”. Most folks think this refers to the brokerage \n\tbig-wigs wanting to get to their summer homes in the Hamptons, but it is \n\tbased on a very old cycle of money flows in the markets. The pros know \n\tthere is very little money to be made in the markets during the summer, and \n\ta whole lot that can be lost.

Many advisers and investors have figured out that warm weather means the \n\tstock markets are much more vulnerable to setbacks than colder weather. \n\tThere have been a number of us money managers talking about this phenomenon \n\tfor a while now. When I first discovered it in 1998, I don’t remember much \n\ttalk about it, at all.

In addition, many advisers and investors have now heard about the \n\tcyclical weakness surrounding the presidential cycle, with the second year \n\tof a presidential term (this year) typically being a weak year, and the next \n\tyear much stronger.

But this year has broken the mold. The summer saw a steady rise in the \n\tmarket, and the normal decline expected at this time in the presidential \n\tcycle has yet to occur.

I suspect that quantum investing has occurred. The mere act of enough \n\tinvestors observing and becoming aware of these cycles seems to have changed \n\tthem. But then I should have expected that. When everyone does the same \n\tthing investment wise, there tends to be very little money to be made.

If you think about it, quantum mechanics work in many areas of \n\tinvesting. Real estate was observed to be a great investment by many, and \n\twhat is happening now? It changed. Now there are too many sellers and not \n\tenough buyers.

Tech in 2000, Japan in the early 1990’s, gold in 1980 all shared this \n\tquantum mechanics phenomenon. The mere act of observing their gains \n\tattracted money from millions of potential buyers, changing them into \n\tpotential sellers. This change in the balance of buyers and sellers became \n\ttheir undoing merely because enough investors noticed.”,1]

But I do know that investing has a dose of quantum mechanics, and a good example of it occurred this summer.

For as long as I remember, a favorite Wall Street saying was “Sell in May, and go away”. Most folks think this refers to the brokerage big-wigs wanting to get to their summer homes in the Hamptons, but it is based on a very old cycle of money flows in the markets. The pros know there is very little money to be made in the markets during the summer, and a whole lot that can be lost.

Many advisers and investors have figured out that warm weather means the stock markets are much more vulnerable to setbacks than colder weather. There have been a number of us money managers talking about this phenomenon for a while now. When I first discovered it in 1998, I don’t remember much talk about it, at all.

In addition, many advisers and investors have now heard about the cyclical weakness surrounding the presidential cycle, with the second year of a presidential term (this year) typically being a weak year, and the next year much stronger.

But this year has broken the mold. The summer saw a steady rise in the market, and the normal decline expected at this time in the presidential cycle has yet to occur.

I suspect that quantum investing has occurred. The mere act of enough investors observing and becoming aware of these cycles seems to have changed them. But then I should have expected that. When everyone does the same thing investment wise, there tends to be very little money to be made.

If you think about it, quantum mechanics work in many areas of investing. Real estate was observed to be a great investment by many, and what is happening now? It changed. Now there are too many sellers and not enough buyers.

Tech in 2000, Japan in the early 1990’s, gold in 1980 all shared this quantum mechanics phenomenon. The mere act of observing their gains attracted money from millions of potential buyers, changing them into potential sellers. This change in the balance of buyers and sellers became their undoing merely because enough investors noticed.

Now you can impress everyone at your next cocktail party by discussing quantum mechanics.

Hepburn Capital Management

2069 Willow Creek Road Prescott, AZ 86301

TELEPHONE: 928-778-4000