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Opinion & Analysis

Adapting to market changes creates winning investors

Stockbrokers watch an index board showing the latest share prices during a trading session on Monday. Flexible investors stand to reap the benefits from the stocks. AFP PHOTO
Stockbrokers watch an index board showing the latest share prices during a trading session on Monday. Flexible investors stand to reap the benefits from the stocks. AFP PHOTO 

With the NASI (Nairobi All-Stock Index) actively searching for a “bottom”, the question isn’t if it will find one but when.

While calling market bottoms is notoriously hard, perhaps we can look to the great philosophers for wisdom on how markets might behave.

With the existing insights into the market - from the most well-known value investment philosophy (Benjamin Graham) to contrarian investing (Marc Faber) to momentum investing (Richard Driehaus) to passive investing (John Bogle) – proving rather unhelpful, I find consolation from an unlikely philosopher: Bruce Lee. 

While most know this legendary martial artist from his tough fight scenes in Kung Fu movies such as The Big Boss and Way of the Dragon, few realise he was as an amazing philosopher.

In 1971, at the peak of his career, Lee starred in a TV series in which he’s recorded delivering his most oft-cited philosophical belief: “Be formless, shapeless like water. If you pour water into a cup, it becomes the cup. You pour water into a bottle and it becomes the bottle. You pour it in a teapot, it becomes the teapot. Now, water can flow or it can crash. Be like water, my friend”.

Now, if you look closely enough, you’ll notice a guiding principle that is so relevant in the financial markets. Though Lee was talking about allowing his opponent’s fighting style to influence the way he fought, the analogy to the market is quite profound.

Think about it – market prices are like huge cups and bottles. Investors need to be adaptable like water to win in every market condition.

Essentially, being like water is not about guessing how far a trend will go or when the tide will turn (read tops and bottoms).

One only needs to ride the trends and not fight them. This approach is not about being the smartest person in the market. It’s about one thing only: following the price. It’s investing without a style.

One more thing, beyond its’ refreshing simplicity, this concept stands out for its effectiveness and efficiency. In the past eight years, while the value and passive books have gotten killed (NSE 20 share index has averaged under 3 per cent while value-oriented fund managers are yet to return 100 per cent, 2009-to-date), trend following has averaged 14 per cent annually in the same period.

Contrarian strategies – I don’t know about you guys, but with six bear runs versus four bull market in the past 10 years, I doubt the market has been kind to you. So, back to our initial question: can we really call a market bottom? The straight answer is no.

However, Lee’s observation gives us a beautiful insight. Financial markets complete with their tranquil and volatile periods are best approached in a reactive manner as opposed to a predictive manner.

This way, when the NASI finally bottoms out, a price follower will see it from the price and adjust accordingly. So after all, more than his action flicks, the Kung Fu master also left an enlightening lesson for the markets. Become like water my friends.

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