A successful self trader – Rule # 26
If there are any 2 typical traits that differentiate a good investor from a great investor; it is patience and flexibility. It is a lethal combination. You need to be patient when you are convinced that you are right. Don’t worry that markets are going against you. But also be flexible, the moment you smell a wrong step. More often than not, dangers are disguised. Be flexible to learn and act; really fast!
BE PATIENT, BUT BE FLEXIBLE…
Peter Tanous is his brilliant analysis of global fund managers, talks about the virtue of patience and flexibility. These are possibly two traits that set apart a good investor from a great investor. Unfortunately, both do not come easy. Patience in the face of challenges to your investment conviction is well-nigh difficult. And, flexibility on your hard-fought beliefs is next to impossible.
When I talk of patience, I normally quote the example of John Paulson, who famously shorted mortgages ahead of the crash in 2007. But it was hardly as simple as it appears in retrospect. The conviction was formed in 2005 and Paulson had been patiently holding on to shorts for close to 2 years. Surely must have been a nightmare, but eventually it did pay off handsomely.
For India fund managers, 1995 and 2008 were critical years in terms of flexibility. 1995 saw a move out of diversified plays into focused plays. No Century, Arvind and Bombay Dyeing. It was focused IT and pharma. 2008 marked a shift from growth to consolidation. Those who saw the trend and shifted out of cyclical stocks and into defensive stocks got the multi-baggers.
3 REASONS WHY PATIENCE IS SO HARD TO PRACTICE
YOU ARE PART OF AN ECOSYSTEM
You are either an individual investor or a fund manager. You are answerable to financers, unit-holders and investors. How do you explain patience to them? More often, the peer pressure of the ecosystem plays spoilsport.
THE OPPORTUNITY COST SURELY ADDS UP
Patience and conviction are great on paper. But you are losing out on opportunities. Your existing losses may be rising, or the stock you skipped may be taking off. You also have your stakeholders to explain to.
SUBJECT OF CONVICTION CAN BE FLUID
Long term macro convictions are ok but often you are betting on micro issues like a turnaround of a company, a stake sale, management change. These are open ended and can make the entire subject of conviction dubious!
“Many shall be restored that are now fallen; many honoured shall fall” – Horace Poetica
6 REASONS TO BE FLEXIBLE WHEN YOU GO WRONG
- Are you missing out a disruptive technology or idea? Bharti in 2003 had a limited market and high tariffs. But the disruption happened when the network started feeding on itself and revenues multiplied even as tariffs fell to rock bottom levels. When there is a disruption, be flexible and learn!
- When you have to wait too long for your conviction, it pays to be flexible. Classic example is L&T in 2010. The capital cycle was negative and order books and margins were getting constricted. Even after 4 years, the stock is nowhere close to its 2010 prices. Rather be flexible than patient.
- Is there any subtle trend you are missing out? Look at how Nokia missed out on the Smartphone trend in 2007. Apple and Samsung took away market leadership. Look at how Educomp lost out to Treehouse in education or how branch banking lost out to ATM banking. Be flexible when trends shift.
- From the days of Polonius, debt has been a four-letter word and it still holds for companies. When a quality company is too much in debt and having unfavourable coverage ratios, stay off the company. You may have conviction but it is time to be flexible on your beliefs; and pragmatic too.
- You have to be flexible on asset classes. Equities are not the best performing asset class always. In fact, more often they underperform debt. Be flexible to shift substantially into debt or even gold if the situation demands. Equities have their cycles and you do not have to participate loyally in the downside.
- When the macros are turning negative, it is time to be flexible on your convictions. In the 2008 crash, the indications of liquidity pressure were visible as early as 2007. It is just that Indian investors thought, India was different. A global contagion spares none. You have to be flexible with your philosophy.
PATIENCE IS A CHOICE, NOT FLEXIBILITY
In a way, patience is the core of your investment process. You have an investment philosophy which is built around your conviction. Your conviction, on the other hand, is formulated and predicated on your years of study, analysis, understanding and experience. Patience is still a matter of choice. You can choose to stick long enough like a Buffett or Lynch. You can also choose to trade in and out like a Soros. It’s a choice.
Flexibility is a Hobson Choice. It can mean the difference between survival and otherwise. Imagine the plight of fund managers who had bet on the infrastructure and real estate story in 2007. It may be decades before they will ever see such lofty valuations. Conviction and patience can be of little use here. Or imagine a fund manager who stuck on to old economy stocks in the 1990s and missed out on the soft skill story of IT and pharma. The opportunity loss would have been huge.
TAKEWAYS FROM THE “PATIENCE AND FLEXIBILITY” DEBATE…
I remember Warren Buffet’s famous quote, “Our holding period is forever”. Buffet was smart enough to foresee many of the biggest trends like consumer spending, insurance benefits, value of brands etc. But the question is will a Buffet who starts out today be as successful in the very long term? Probably, he will be, but there is a catch.
The last 8 years have been more about opportunities, fleet-footedness and flexibility, not so much about conviction. A dovish money policy has ensured that identifying the cutting edge of shifts is more relevant. In a situation like this, it may make more sense for investors to focus on flexibility. We live in an investment climate where trends change, undertones shift and technologies disrupt on a regular basis. Cheap oil may be the first of many such trends. Back to the future!
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