Digital Wealth

Chapter 11 Learning from Nobel Prize Winners

“If I have seen further it is by standing on the shoulders of giants.”

—Isaac Newton

In investing there is no shortage of freely available good ideas. Unfortunately, there are many publicly available bad ideas as well. For example, the news media is more interested in creating an attention- grabbing story than a truly robust analysis. The good news is that there are some tests we can use to keep us on the right track by separating the signal from the noise.

One of the best checks for quality of academic thinking is peer- reviewed academic research. Any academic paper in a journal is reviewed by others before publication and then cited in subsequent papers according to its usefulness. Not all journals are peer reviewed, but most of the leading ones are. Citations can also be a useful metric for quality of academic thinking—thinking that is cited by other academics is often high quality. Of course, these papers are often less fun to read than the latest news stories, but they contain ideas and concepts with rigorous academic thinking and are more likely to be useful to an investor as a result.

The very best thinking ultimately receives the Nobel Prize, often after the research has had a chance to be tested after a decade or two. That doesn’t mean Nobel Prize–winning thinking is bulletproof. It still may be disproved or modified at some time in the future, but you stand a pretty good chance of having a robust portfolio if you’re building ...