Adopt to survive and thrive
Robert Vinall writes that there are two contrasting approaches to investing – one placing more weight on the future; the other on the past. They are a reminder that the optimal strategy is a function of the era you invest in. If you are in a market characterised by rapid and widespread change, it pays to be forward-looking despite the inherent difficulty of judging the future. If, on the other hand, you are in a market where the pace of change is slower and more localised, then it may simply be better to bet on reversion to the mean as the future is too uncertain and genuine change too infrequent.
The older generations of value investors invested based on the assumption that historical patterns of cashflow generation would reassert themselves – better known as “reversion to the mean” – seemed the better strategy. Many of the great investing track records were built by investing in stable, unchanging businesses when they went through a period of underperformance on the assumption that they would eventually recover. It was an approach to investing that was based on a good understanding of a company’s history and the assumption that the future would not look too different to the past. It worked far better than betting on companies with short histories and big plans for the future, and it seemed obvious that it would continue to.
When the investing era changes, older investors have to adapt, which in practice does not so much mean learning new tricks as unlearning old ones. The former is certainly easier than the latter as learning is fun, but parting ways with cherished ideas are painful. In one important respect though, there is an advantage to experience. When the nature of the market does change, it should, at least in theory, be easier for the investor that has lived through different types of markets to adapt than for the investor who has only experienced one type. The younger investor suddenly finds themselves in the position of the older investor without the benefit of having experienced a change in the market before.
To increase the chances of adapting to different markets, Vinall sees one big thing an investor should do and one big thing they should not. The single biggest thing they should do is commit to adapt. The single biggest thing an investor should not do is tie themselves to a particular investment style or geography or industry or any other categorisation.
