In their book The Systems View of Life, authors Capra and Luisi distinguish between analytical thinking – which involves taking something apart to understand it – and systems thinking – which means putting it into the context of a larger whole. They note that,
“the tension between mechanism and holism has been a recurring theme throughout the history of Western Science.”
The tension is not so overt in investment analysis but is there nonetheless. Portfolio managers tend to focus on the systemic wood whilst stock analysts get lost in the mechanical trees. Strategists adopt top down systemic models in contrast to analysts bottom up forecasts. Traders focus on the behaviour of the market system; analysts focus on mechanical understanding of the company.
Whilst both methods of thinking are important and necessary at different times, a proper Investment Framework needs to be built upon a Systems Solution. In this post we distinguish between the two approaches.
The Analytical (Mechanichal) vs Systemic (Holistic) Approach
According to Capra and Luisi, the systems way of thinking involves “thinking in terms of connectedness, relationships, patterns and context.” These systemic properties belong to the whole of the system and so cannot be understood by looking purely at the individual objects. They distinguish the two approaches as follows: