Claude Shannon was a polymathic genius. Vannevar Bush believed that Shannon was “an almost universal genius, whose talents might be channelled in any direction,” according to the book about Shannon’s life, A Mind at Play. Bush himself was a giant amongst men; among his achievements were the construction of an analog computer (a differential analyser) in 1931, and leading the Manhattan Project (the name of the US government’s project to build the atomic bomb during World War II) to success.
As for Shannon, he is perhaps most well-known for the creation of information theory in the 1940s, a collection of ideas that form the foundation for much of how information is transmitted electronically today. But he was not just an amazing scientific thinker – he was also an incredible investor. David Senra has a podcast series named Founders and in an October 2019 episode, Senra spoke about his learnings from reading A Mind at Play. During the episode, Senra said:
“When I covered Fortune’s Formula, Claude Shannon had one of the best investing records of all time. They compared like 1,025 different investment managers. This is professional managers doing it full-time – hundreds of researchers having all kinds of resources and Shannon’s investment returns were better than all of them. And he did it part time, with his wife on an Apple II computer. This kind of gives you the person we are dealing with here.”
So how did Shannon think about investing and the stock market? Senra said (emphases are mine):
“Shannon’s most attended lecture ever was when he started talking about the stock market. Everybody thought that he is a mathematical genius and he must have all the algorithms and that he can predict everything. No. He realised that he could not do that.
So his approach which I found fascinating. “Complicated formulas mattered a great deal less”, Shannon argued. “It is the company’s people and products.” He went on, “a lot of people look at the stock price when they should be looking at the basic company’s earnings. There are many problems concerned with the prediction of the stochastic processes. For example, the earnings of a company is far too complex. The general feeling is that it is easier to choose a company that is going to succeed than to predict short term variations, things that will last only weeks or months, which they worry about down on Wall Street. There is a lot more randomness there and things happen which you cannot predict which cause people to sell or buy a lot of stock.”
It was his [Shannon’s] view that market timing and tricky mathematics were of no match to a solid company, strong growth prospects, and sound leadership. And this is also something that we heard a lot the last few weeks from Buffett and Munger who would agree with his statement there.”
In a September 2017 article for his blog Abnormal Returns, Tadas Viskanta – the Director of Investor Education at Ritholtz Wealth Management – wrote about Shannon and A Mind at Play. Here are some excerpts from the book Viskanta picked out that further fleshed out how Shannon invested:
“The bulk of his wealth was concentrated in Teledyne, Motorola and HP stocks; after getting in on the ground floor, the smartest thing Shannon did was hold on…
…He and his wife were, in his own words, “fundamentalists, not technicians.” The Shannons had toyed with technical analysis and they found it wanting. As Shannon himself put it, “I think that the technicians who work so much with price charts, with ‘head and shoulders formulations’ and ‘plunging necklines’ are working with what I would call a very noise reproduction of the important data.’”
Put simply, Shannon’s view on investing is that investors should be focusing on the long-term business health of a company, rather than the unpredictable short-term movement of its stock price. If this is good enough for a genius such as Shannon, it is good enough for me.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
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Disclosure: Ser Jing owns shares of Apple.
