Run In Your Own Investing Lane

Recently, a very well-known and respected investor magnanimously gave me some investing advice that did not resonate with my situation. To this, a friend of mine said: “You can’t take advice from someone who is so fabulously rich that he can never comprehend the nuances of your situation or your insecurities.” That hit home.

My friend is a financial advisor and knows how to adapt his advice based on an individual’s situation. It made me realise that all investors are not good advisors; and it also made me realise something very important: as investors, we share the identical field (market), but are playing starkly different games, and in completely different leagues.

Consider running, for instance. A sprinter will focus on developing fast-twitch muscle fibres using plyometric exercises and strength training. The focus is on improving speed, strength and power. Marathoners, on the other hand, focus on developing cardiorespiratory fitness, muscular endurance and stamina. Sprinters also have perfect timing and immense power, and can switch on a burst of acceleration over a short distance. However, the sprinter’s attribute of pure power entailing plenty of fast-twitch muscle becomes a liability in the mountains. For mountain climbers, it is the power-to-weight ratio. They invariably have a bird-like frame, are mentally very tough and have immense stamina. Unfortunately, mountain climbers can’t sprint with the best.

Let’s take the example of tennis. If a tennis player wanted to develop a forehand on the run, she could isolate this movement by being hand-fed one challenging wide ball at a time—which would require her to move explosively towards it and attempt to hit it with substantial power. Once power and explosiveness are consolidated to a higher degree, then the player can focus on accuracy. Even within a sport, a player may require a change in training to develop specific skills.

Now, let’s take cycling. Time trial specialists have plenty of power coupled with a highly efficient cardiovascular system, allowing them to maintain high power output for long periods of time. But they must grit their teeth to hang on in the mountains. Long stages on rough roads tend to wear down the lighter riders who are better at mountain climbs, but suit time trialists who are both strong and fit. No one cyclist is good at all geographical conditions.

How Do These Sports Analogies Apply To Investing?

There are no cookie-cutter solutions when it comes to investing. What works for one, may not work for another. Take two investors, who are earning the same and are of the same age. Are they identical? On the face of it, yes. Dig deeper and their situations could be completely different. One could have a steady income, and the other variable. One could be earning from just one source, the other from multiple. One may have dependents, the other may have none. One could have loans to service, the other may not. So if you give an investment strategy based solely on age and income, there could be a complete misalignment to their individual circumstances.

• Investing is not a homogeneous game. What is optimal for one investor may be disastrous for another. There is no “typical investor”. Besides the above factors, there are so many non-numerical issues, such as risk capability one’s individual ability to withstand volatility.

I remember my friend’s son telling him that he should take more risk with his money. My friend responded: “If you make a bad investment, the repercussions are not destructive. If I make a bad investment, it is not just me getting impacted, but even my wife and son. That’s because I am saving for our retirement and your education.” Also, what you want your money to do for you is very different from what I want my money to do for me. This is why taking advice from family and friends can backfire. Their intentions are good, their comprehension of the nuances of investing behaviour and various products is not.

• Everyone’s time frame is different. Way back in 2017, I read an interesting post that questioned: How much should you have paid for Yahoo! stock in 1999?

Why Yahoo!? It was an iconic brand that ruled the Internet in its early days and was the most popular starting point for Web users. On April 12, 1996, Yahoo! traded publicly for the first time. At the end of its first day of trading, its stock closed at a (split-adjusted) price of $1.38. On January 3, 2000, it closed at an all-time high of $118.75. Between these two dates, Yahoo!’s stock price had increased by 8,505 per cent. That is in less than four years!!! Also, looking at how artificial intelligence (AI) stocks have performed globally, I could not help but draw an analogy from the dot com boom.

The author answered the question as to how much one would have paid by looking at various investing philosophies. For someone with an investing horizon of 30 years, the right price would require a sober analysis of Yahoo!’s discounted cash flows (DCF) over the subsequent three decades. For someone with a shorter horizon of just 10 years, it would require an analysis about the industry’s potential over the next decade and whether the management could execute on its vision. While if the horizon was just 12 months, then an analysis of current product sales cycles and the possibility of a bear market would do. A day trader, on the other hand, would just need to look at a few hours. His aim would be to squeeze a few basis points out of whatever happens between breakfast and lunchtime, which can be accomplished at any price. A day trader could accomplish what he needed whether Yahoo! was at $5 a share or $500 a share, as long as it moved in the right direction.

Replace this with any stock of your preference at any different point of time, but the lessons are the same. The field is the same (stock market and a particular stock). However, depending on your time frame, you are playing a different game. And accordingly, you will pay attention to different factors and parameters.

• You decide the rules of your game, and stick to it. Don’t get swayed by the calls of others. A long-term investor should never take his cues from a short-term investor or a trader. One who is afraid of volatility should not have the same portfolio as an aggressive investor. Asset allocation (how you distribute money between various asset classes) and position sizing (how much you will invest in a particular fund or stock) is driven by individual circumstances. Remember, there is rarely a clear-cut right or wrong. It is just different perspectives. What drives others and what they want could be radically different from what you seek.

Run in your own lane.

By Larissa Fernand, Behavioural Finance Expert