Tennis professionals are expected to make ideal swings all the time.
By training hard, they are supposed to be able to repeatedly make the right moves, hitting the perfect serves and placement they want, thus enhancing their chance of winning.
Now, when it comes to the investment world we cannot expect the same strike rate, since there are far more variables and many of them are outside investors’ control.
Political and economic events could change market sentiment, rebalancing of index funds could move share prices, just to name a few. There are an enormous number of market participants and the investment environment changes drastically over time.
This is why in Charles Ellis’ book ‘Winning the Loser’s Game’, he called tennis a winner’s game and investment a loser’s game.
Unlike tennis players, investors do not have a lot under control; they should therefore try to avoid difficult situations.
Instead of always thinking of how to make profit, it’s more important to minimize mistakes and losses, and wait for the right opportunity to come by.
In investment, the costs of “making the wrong swing” can be stiff. Expensive trading costs will also erode your profit.
To avoid mistakes, the first step is to buy only when the market prices drop below fair value.
At the same time, one needs to stay away from bad companies no matter how cheap they are.
Last but not least, they should avoid bad years. Systematic risk would lead to great losses even if you have followed the first two rules.
The market gets into the bear cycle roughly every 10 years. We have experienced large setbacks in 1998 and 2008.
Coming to the present situation, as global markets continue to set new highs and valuations are on the rise, we can ponder this question: will 2018 be another bad year?
The recent weakness of US small caps could be a warning signal. While the bull market still looks resilient, rushing into the market now, or piling up on stocks at the current level may be a bit too late.
Perhaps investors should wait for a better chance to “make the swing”.
This article appeared in the Hong Kong Economic Journal on June 14
Translation by Julie Zhu
[Chinese version 中文版]
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