Day 9 - Market Blueprint: 10 Insights for Smart Investing
Priced in
Always ask yourself if the market is already reflecting your view of its prospects. Edge lives where your view is not reflected in the market and the market is mispriced or needs to catch up. Identifying this gap can be where you make significant returns. Assess the market sentiment and compare it to your analysis. If you see a disparity, that's where your opportunity lies. Finding the mispriced market is key to smart investing.
Capital Efficiency
You only have a finite amount of capital, put it to good use. Ask yourself if this is the most cost-effective and return-maximising way to execute an idea. Not all investment strategies are created equal. Consider factors like liquidity, fees, and trading hours. For instance, opting for a low-fee index fund might be more efficient than actively trading stocks with high fees.
Multi-dimensional Views
Have a tactical (short term), cyclical (medium term), and structural (long term) view of the markets and most importantly, do not let them get in the way of one another. You can be cyclically short and tactically long. This means you might bet against the market in the medium term but invest in short-term opportunities. By balancing these perspectives, you can navigate market fluctuations more effectively.
Market Irrationality
Understand that flows, sentiment, and positioning can contribute to irrationality in the markets and can often shadow the underlying macro. Even if you're right in the end, no one wants to get squeezed or stopped out early. Recognise that markets can stay irrational longer than you can stay solvent. Keep an eye on market sentiment and be cautious of crowded trades.
Discipline
Respect your stop loss, it is there for a reason (to stop any further losses). The longer you're in the game, the better. Discipline helps you manage risk and survive in the market. Set clear stop-loss levels and stick to them. This practice will prevent small losses from turning into catastrophic ones. Maintain discipline to manage risk effectively.
Portfolio Clarity
Avoid rationale drift, this is where your thesis on a trade starts to diverge from the initial reasoning. One piece of advice I was given by a senior fund manager was the following:- Get a piece of paper and envision your ideal portfolio and state your reasonings. Then compare this to your current allocation. Understand why it differs (if at all) and make the necessary changes. Regularly reassessing your portfolio ensures alignment with your original investment goals and strategies.
Back to Basics
If in doubt, go back to basics both from an economics standpoint, portfolio, and an equity/bond market view. What are they telling you and how does your view compare? Re-evaluating fundamentals can provide clarity during uncertain times. Look at economic indicators, company fundamentals, and market trends to ground your decisions. Also consider what variables under the hood are delaying what you would traditionally expect using basic economic theory.
Filter the Noise
Not every data release is relevant or market-moving. The importance of a data release often is determined by market sentiment and narrative. For example, no one cares about Core PCE in a raging bull market, but they do currently. Focus on the information that truly impacts your investments and ignore the rest.
Long-term Themes
Pay attention to trends that will shape the market over the next decade, such as energy transition, technology, geopolitics, and China. Long-term trends can offer significant investment opportunities. By identifying and investing in these trends early, you can capitalise on major shifts in the market.
Strong Opinions Weakly Held
Be prepared to accept when you are wrong. You are here to make money, which requires being nimble and not having an ego. This includes consuming content you do not agree with and thinking critically—a rare and valuable thing today. Being flexible and open-minded allows you to adapt to new information and adjust your strategies accordingly. Your job is to find the objective truth of what is going to happen, don't be afraid to stress test your views, it's the whole point of this game.