Much of the world these days seems to be looking backwards. Teenagers are again wearing oversized t-shirts and baggy flared pants - I fear pleated trousers could be next to return.
Hollywood has also gone back into sequels/reboots of fan favourites of the past. Everybody with access to a streaming platform can watch classics such as Jaws, Boyz n the Hood, The Lion King, Superman, and A Soldier's Story. And there’s a good financial reason why this happens.
For movies, besides reconnecting us with beloved characters and storylines, the emotional reassurance and the comfort of nostalgia means more cash at the box office.
That said, the strategy works until it does not. We’ve seen some notable “franchise films” seriously tank at the box office (same as retro fashion).
Does that prove that sometimes the past and the present are just too far apart to reconcile? I think so. Same can be said of investment strategies.
Once upon a time, in the “wealth accumulation” Kibaki years, many followed an aggressive growth strategy - a strategy that worked. It went like this: invest in equities such as blue chips and watch them rise. Rinse. Repeat. This is because the market then had a more predictable upward momentum.
Market capitalisation went up 10x with an average compounded growth of eight percent - that’s 2x your money within 10 years. That formula worked until it didn’t.
Enter the 2012 to 2022 era and many had no idea how to contend with violent swings and an increasing frequency of bear runs. In another period, players almost believed that the IPO (initial public offer) market was a “sure bet.” The approach was simple: buy in the primary and sell in the secondary.
The greater fool theory. Indeed, a number of debuting counters churned out tidy gains. In fact, the style was so popular and brokers busy - it’s the only season market turnover rates crossed over 10 percent for three years consecutively. Again, the formula worked until it didn’t.
So, when strategies underperform, what do we do? Start by understanding the times. Take note of existing conditions whether that be thinning liquidity, low investor confidence, poor economic growth, an overreaching regulator, high interest rates, etc, and adjust or not.
The idea is to weigh what's new and important then judge if it's necessary to tweak your strategy. Changes affect your position sizing, risk management, entries, etc.
If nothing works, deconstruct and build afresh. Run back tests in different markets before use. Update your watchlists and so on. Do all this while faithfully holding onto the age-old principles: diversification and investing long- term. In summary, when you know your investment approach is out of style, adapt; it is the only way to survive.
Past performance is not indicative of future results. Stay alive to the point that your investment strategy may have a sell by date. Don’t fall into the trap of believing that previous success guarantees future gains.
The market is a complex mechanism subject to instant changes. It is unpredictable and affected by unprecedented events of which no one knows the source or the direction forward.
The writer is the Managing Director, Canaan Capital Limited.
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