I have only been an investor for one period of my life. Between 2011 and 2013 I had a spell with more cash on hand than obvious things to do with it, and enough time to work out how to open a stock market account. Since 2013 I have sold occasionally when I needed cash – either a company that I had fallen out of love with or a slice from a company that had done very well. I have only bought one company, Tesla, at the start of this year, far too late.
I have learned that one key decision in investment strategy is the desired frequency of trading. Some people trade nearly every week, trying to play the game almost as a job. Others refresh their portfolios many times each year. Nowadays that is a feasible approach because various websites make it so easy to trade, but I still feel that approach is not for me, mainly because I don’t want trading to become an obsession or to take up too much of my time. I have seen many people become wealthy and then spend an unhealthy amount of their time counting their loot, and it does not usually seem to be conducive to a balanced life. Perhaps these people did not heed yesterday’s rather confusing gospel.
So, partly out of fear of myself and partly laziness, I tend to stick with what I have most of the time. I even ration myself to once every two months to check how things are going. Maybe this preferred frequency will change in the future but for now it works for me. I only occasionally get angry with myself for missing out on perceived opportunities. I know how lucky I am to have any such opportunities at all.
What I realised more recently is that the strategy for frequency should be a key determinant of the strategy for where to invest. Day trading is about riding waves and trying to follow the herd. Investing is not like Vegas gambling because it is not a zero-sum game. If a stock or a whole market rises then everybody can win together. You don’t have to beat the competition; you only need to emulate them while they are winning. It is true that every trade has a counterparty, so somebody somewhere is losing, depending on how you look at things. For a day trader, however, that is over-thinking the issue.
A consequence is that it can make sense as a day trader to plough money into what appear terrible investments. The recent meme stocks are merely an extreme example of this point. We can all see that Game Stop is a terribly run company stuck in a market that has no future. But hey, if lots of people want to buy the stock then it will rise. Join the stampede and you will gain too, perhaps outrageously so, so long as you remember to jump off the bandwagon no later than everybody else.
The overpaid people on Wall Street would deny it, but their own strategies are almost as cynical. If there is a stampede, they must be a part of it because otherwise their clients will see lower relative returns and run to the competition. This goes some way to explaining the cryptocurrency boom, and even something as apparently dumb as Theranos, the company which claimed a breakthrough in blood testing without any proven technology to support the claim. How could everyone have been so dumb as to pile in and not question such plainly false claims? Well, if you are a junior trader you don’t have time or skills for your personal due diligence, and you don’t want your boss complaining about your returns going down. You suppress your doubts and buy with everybody else, remembering to sell with everybody else (or even a tiny bit ahead of everyone else) later.
If you are a portfolio tinkerer, you probably steer clear of such frippery, but you are certainly looker for waves that last longer. At the start of the pandemic, it did not take a genius to invest in Zoom, or Netflix, or even Peloton. The surprise was that this remained true even after their prices had shot up to levels that seemed too high considering fundamentals. Even when markets are supposed to be smart, waves last longer than you might think. The day trade herd mixes with the tinkering crowd to keep things going forwards. It is only in 2022 that such companies have become poor investments.
I have also learned that entire markets have wave characteristics, not just the individual stocks within them, so a frequency strategy needs to be paired with some insight about a market cycle. This seems obvious, but the problem is that most of us don’t have vast sums of cash lying about. The time when the market is turbo-charged is likely to be the time most of us are already leveraged. And the correction of 2022 was rather easy to foretell, but what are we supposed to do with all the cash we release by being super-smart and selling up? Cash hasn’t exactly been a winner in 2022, and property hasn’t either. Bitcoin, anyone? Most of us just have to ride it out and tinker at the margins.
This holds true for tinkerers but even more so for buy-and-holders like me. But I think I have spotted another possible lesson. When I made my investments, I tried to focus on fundamentals. I looked for sectors that seemed to have a medium-term following wind, based on demographics or established consumer trends or regulation or competitive situations. Porter’s five forces is a great mental model for that. Then I looked for companies I thought were well managed within those segments. I was sometimes wrong, but I was also sometimes right, and many of those same advantaged sectors and well-run companies persist even now.
In the meantime, at times I have been rather frustrated, not least by the Bitcoin or Game Stop crowds. In my mental model as an investor, people crowding into those areas are almost cheating. In less greedy moments I realise they are not; they merely have a different frequency strategy and are often being smart in that situation, even if they are eating my lunch.
But phases of the market may indicate the best moments for different strategies, and perhaps I was very lucky. In 2011-13 the market overall was at a low point, so it turned out to be a good time to enter. But the recovery was a tentative one and interest rates were still significant, so investors were somewhat cautious. Theranos and the others only started appearing once the market became frothy and interest rates tumbled towards zero. At that point the piling in strategy made sense, but not in 2011-13. 2011-13 was a time for fundamentals.
Now I am wondering if the wheel may be turning again and if 2022-24 may be a period for fundamentals again. Nearly everything is down, but those with poor fundamentals are the ones that have collapsed.
I am in no position to invest and am still cautious about my own behaviour, but maybe I will start looking at companies and sectors more closely again. My go-to publication for this, as for so much else, is the business section of The Economist, especially the Schumpeter column. My only issue is that so far in this unusual downturn, the business editors do not yet seem to have found their feet. I must be patient, a little cynical, and analytical.
Last week, the business section had a rather thin article about the strange strength of the labour market, which I twinned with the Bartleby column about somebody who has become a meme with a Tiktok video telling people not to be slaves to work – if anything a further symptom of a moment of worker power.
I liked an article noting that technology and other firms have started hiring Economists, because they know how to handle complex data. This is significant: I believe one aspect of next wave of AI will be about smarter slicing of data, beyond merely targeting ads. An example could be more subtle characterisation of outlets within a retail network, with assortments, atmospheres and practices varied according to segment. I twin this with the Schumpeter article about Starbucks, noting that the four closest Starbucks outlets to me serve radically different market segments, and that smarter tailoring could be a differentiator for the brand.
The article about European utilities noted a variety of possible paths ahead during the forced transition away from Russian gas. The final article was about beauty products, and this also interested me. During the “piling in” phase, start-ups could secure funding based on as little as an idea and a couple of influencers. Now the incumbents, who know more about supply, branding and sustaining consumer loyalty, are fighting back.
So the wheel is turning and the next year or two may see benefits in following fundamentals, both as managers and as investors. The energy transition (especially as regards batteries and other peripherals), the developing cold war with China, and smarter uses of big data can be added to established trends to form a fascinating context. Perhaps I will become a tinkerer, at least for a while.
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