The wheel of fortune in investing

By | CYH

There is no one strategy that always outperforms.

Be it growth, value or any other strategies you have used or have heard of, do not outperform all the time. Growth has done very well for a handful of years, probably between 2017 and 2020. But between the later half of 2021 and early 2022 growth was disastrous while value has made a comeback after languishing painfully for years.

There is no one market that always outperforms.

The US stock market has been the best performing market for a good part of the last decade. But US market, like every other markets, do not outperform all the time. One of the worst periods for US stocks was between the Dotcom bust and the Great Financial Crisis. It actually delivered a negative return even after 10 years.

There is no one sector that always outperforms.

Tech stocks have delivered great returns prior to the crash in the sector we are seeing now. Many ‘traditional’ sectors were avoided because investors felt they were passé. And then the commodity sector came roaring back. Most notably was oil and gas stocks where crude oil price recovered from below $0 to now more than $100.

There is no one asset class that always outperforms.

While commodities are in a bull run now, they don’t last forever. The last run was in 2006-2008 and it crashed and slumped for more than 10 years. Stocks obviously offer scary crashes too. Bonds tend to do well when stocks crash but this time it crashed together. Crypto has already crashed after outperforming almost every other asset class. Real estate is still strong but it can slump for a decade like what it did between 1997 and 2007 in Singapore.

Everything has a cycle as depicted by the wheel of fortune, alternating between prosperity and poverty.

It was a similar experience for Bruce Lee. He felt using solely Wing Chun technique wasn’t sufficient. He started to adopt other techniques such as fencing and boxing. This enabled him to use the best technique against an opponent in a particular setting. He believes in style with no styles.

Here’s his famous quote to analogise how one should be adaptive.

“Be Water, My Friend.
Empty your mind.
Be formless, shapeless, like water.
You put water into a cup, it becomes the cup.
You put water into a bottle, it becomes the bottle.
You put it into a teapot, it becomes the teapot.
Now water can flow or it can crash.
Be water, my friend.”

Increasingly I believe an investor should drop the label – I’m a ‘growth investor’ or ‘value investor’ or ‘trend follower’ or “tech investor” or any particular style. Instead, learn more styles and know when to use what in the right circumstances.

If you prefer something closer to finance, we can turn to Dan Loeb’s (fund manager of Third Point) latest letter to investors.

“The key, of course, is to change your framework when the environment changes…

Since I started Third Point 27 years ago, I have seen many investors (including myself) stumble after years of success because they did not adapt their models and frameworks quickly enough as conditions shifted. I have said before that they don’t ring a bell when the rules of the game are changing, but if you listen closely, you can hear a dog whistle. This seems to be such a time to listen for that high-pitched sound.”

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