On The Importance of Strength and Adaptability in Investing
“It is not the strongest or most intelligent of the species that survives but the one that’s most adaptable to change.”
- Charles Darwin
“Do not pray for an easy life; pray for the strength to endure a difficult one.”
- Bruce Lee
The reality is that, while the world is a beautiful place full of endless opportunities, it can also be challenging. At times, business can be hard. Investing can be hard. Life can be hard.
It is those who have the strength and the ability to adapt who not only survive but thrive. Let’s apply this notion to what is happening in the world of investing – and likely to you.
Great businesses like Starbuck’s are continually adapting - evolving - so that they may survive in an ever-changing marketplace. When the pandemic hit, they quickly realized the importance of contactless service and opened/converted many locations to drive through.
Long before most companies realized the opportunity, Amazon – a company that was ridiculed for years that it would never make it selling books online – started offering cloud storage to businesses. Amazon now generates about $20 billion a quarter from this division (AWS) alone.
Successful sports teams adapt to new game plans, surviving nations adapt to new environmental trends, and to the point, successful investors adapt and evolve as well.
To be clear, as with the laws of physics, some things in the world of investing are constant. Companies with positive cash flow and strong balance sheets (not overly leveraged) tend to survive inevitable economic declines.
So where does the idea of being adaptable apply to one’s investing approach? As with most things in life, it all starts between the ears. Regardless of intelligence levels, behavioral patterns tend to be repeated over and over. In effect, most people are unable to adapt their bad habits into good ones and that leads to repeated failures. Here are some common ones and ideas on how to make changes so that you too can not only survive but thrive in any market environment, especially challenging ones like we are currently experiencing.
- Many investors sell stocks when they are down materially, not because they need the cash anytime soon, but out of fear. If this has happened to you or you are considering selling because you ‘can’t take it anymore’, then look closely at your cash balances, cash flow, and upcoming cash needs. If you have planned well (and listened to our repeated advice about setting aside cash reserves regardless of current market conditions that will inevitably change like Chicago’s weather), then you have at least a year’s worth of cash set aside. Given that the average bear market lasts around a year, and the likelihood that by the time you become concerned about market conditions, prices have already declined considerably, it is quite possible that the markets are closer to the end than the beginning of whatever declines they are going through. As such, taking no action will probably serve you better than taking action to fulfill some near-term emotional need (to feel in control). If you have not set aside cash and are forced to sell stocks into weakness to cover near-term cash needs, then evolve as an investor by starting to build cash reserves so that you do not end up in the same situation a few years from now.
- If you find yourself chasing after the latest fad stocks not based on any real fundamental research but out of FOMO, consider implementing the ‘3 Day Rule’. This is a technique that focuses more on doing things well, not quickly. Stock ownership is meant to be for time horizons in the years, not days or weeks or even months. As such, what is 3 short trading days in the bigger scheme of things? What it represents in most cases is a ‘cooling off’ period where your rational brain has a chance to catch up to your emotional one that feels compelled to jump on the latest trend with little knowledge about the underlying investment. Most fads end very badly; read a little stock market history about other periods when investors piled into stocks with no fundamentals to support them – think the late 1990s. By adopting this one simple rule you are more likely to improve your investing results over time.
- If your belief is that the world is falling apart, that this decline is different, and that it will never end, then the way to evolve – to adapt – is to google ‘how long do bear markets last?’ You will be quick to discover that every bear market in history has ended, often surprisingly quickly, before heading back up as stocks do over time. This should give you comfort that despite all the negative headlines, there is still a possibility – in fact, a good probability – that current challenging conditions will subside, and the sun will come out sooner than later.
- If you have never had an investing/financial plan performed (as Tyson said, everyone thinks they have a plan until they get punched in the face), then seek out a financial professional to perform one for you. This is a great form of adaptation as it will help to give you comfort and confidence – and reduce the emotions around your near and long-term financial picture.
Often the biggest impediment to success is oneself. However, humans have a unique ability to adapt if they really put their minds to it. If you find yourself repeating old, ineffective investing behaviors, take a moment to identify them and set forth a plan as to how to change them. Your future self – and bank account – will be appreciative.