A successful self trader – Rule # 24
We have learnt in the theory of evolution that it is not the strongest species that survives. It is the species that adapts best to changes. The same applies to trading and investing. A rigid approach can finish you. If you adapt your strategy to changing market dynamics, you are most likely cut out for the long haul. The choice is yours; whether you want to be the giraffe or the dinosaurs! Adapt or get trampled.
WHY IT IS SO ESSENTIAL TO ADAPT…
Back in 1998, a group of investors found it difficult to digest that a software company without any worthwhile assets, plant and machinery, could be a great investment. Where is the value; was the standard refrain. They turned out to be grossly mistaken as software outperformed other sectors by a huge margin. And these were extremely savvy investors in the market.
The problem was never about investment strategy, but about adapting your investment thinking. The old school could not reconcile to the fact that a service company without assets could create value for shareholders. In the focus on physical assets, these investors had forgotten that in the knowledge economy, the real wealth created was always going to be intangible!
Two classic cases stand out as examples of failing to adapt. Textiles are a basic necessity was the view. But Indian textile companies were losing out to cheaper manufacturers in Asia. In the second case, nobody was interested in buying oil companies due to the subsidy burden. In exactly 2 years the subsidy is zero and oil marketing companies are multi-baggers. What a miss?
3 REASONS WHY ADAPTING TO CHANGES IS DIFFICULT
A PREFERENCE FOR OUR COMFORT ZONE
Our trading and investment strategies are tried and tested. They have worked well in the past. Hence we do not see, either the logic or the necessity to change our style and adapt to a new style. Comfort zone can be addictive and dangerous!
WE ARE GENERALLY SKEPTICAL ABOUT NEW IDEAS
Scepticism is actually good, but not at the cost of flexibility. In the case of technology, Ecommerce, telecom and media, I find that investors have been sceptical for too long. Not a great case of adaptation to changes!
MOST NEW IDEAS AND TRENDS HAVE A GESTATION
This is the biggest challenge! People may have been frustrated by software in the early nineties. Today investors are betting on media and alternate energy and find the returns not coming in. Gestation can be a great barrier to investment decisions.
“I would define Intelligence as the ability to adapt and change” – Stephen Hawking
6 TRENDS THAT TRADERS AND INVESTORS NEED TO ADAPT TO
- Traders, the world over, have to get used to greater volatility. Even for a casual trader it is apparent that volatility is making it difficult for traders to make sense of the short-term market. As an inter-connected world deals with a plethora of issues simultaneously, volatility may become a norm. Get used to it.
- Passive may trump active more often. Don’t be surprised if index funds start outperforming the active funds. As uncertainty grows, investors may prefer the safety and stability of index funds. And fund managers may find it harder to detect value stocks in an overcrowded market.
- Do not write off the power of gold. In a market with too much liquidity, gold may be the last asset to hold value for real reasons. As the world gets more volatile, geopolitically, more investors would and should prefer gold as an asset class. The sheen will stay much longer than you anticipate.
- The China demand story may be nearing its end. Which means metals may not be the same game as before. China is riddled with bad debts, shadow banks and a bloated loan book. It can no longer afford to be the commodity buyer of the world. All investors need to adapt to this trend.
- No market will be spared the pain of US tightening. As rates rise and liquidity gets withdrawn, all emerging markets will face an unprecedented shortage of liquidity. Markets driven by liquidity, like India and Latin America, need to be prepared for the pain. Investors watch out.
- Good companies will still survive, great ones will still thrive. The market will be all about that big idea. How an Eicher changed its fortunes by focusing on the Enfield. How a TTK Prestige enhanced margins. How Infy can bounce back. How Sun Pharma can globalise. Watch out for these stories.
WHAT WE CAN LEARN FROM ADAPTATION
Adaptation has to be understood at 2 levels. First is the ability of the trader or the investor to adapt her strategy to the changing scenario. You may have a strong belief in manufacturing but services like software and banking today account for over half the index. You need to understand that and adapt. Secondly, as an investor you also need to focus on companies that have the ability to adapt.
IDBI and IFCI failed to adapt to the new universal banking paradigm, something ICICI and HDFC managed pretty well. And that made all the difference! As a trader your strategy has to be nimble and flexible. As markets get more volatile, look for more frequent churning. A buy-and-hold strategy will not work when there is macro level value destruction. And the past is a lousy guide even to the present, leave alone the future. Remember, no two bull markets in India were led by the same sectors or same set of triggers. You need to adapt.
TAKEAWAYS FROM THE “ADAPT TO CHANGE” DEBATE…
A good trader knows how to book profits but an outstanding trader knows how to book losses. It is in times of losses that your adaptation ability gets tested to the core. It is a difficult task to admit that you were wrong and act on it. Great investors are not just about conviction and perspective. They are about adapting themselves constantly to change.
Millions of years ago when the world was short of flat vegetation, the giraffe learnt to adapt by stretching its neck. Its long neck is probably the best example of how to beat the odds by changing and adapting yourself. This is equally applicable in the field of investing and trading. The savvy investor, who adapts and modifies moves ahead. The rest of the crowd eventually moves out!
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