Why Situational Awareness is so important for investors
I first began writing about Situational Awareness back in 2002, after the bursting of the Tech Bubble. The bear market that followed in the wake of the bursting bubble was nasty. It was deep, and it was relentless. No asset class was spared, except government bonds which can always be counted on as a safe haven from turbulent equity markets.
Situational Awareness is a simple concept to grasp, but a difficult one to deploy in real time. At the core, it just means being mindful of changing conditions in the economy and the capital markets. The hard part is deciding which measures of changing conditions to use in this effort. I have developed a robust model for this purpose. My model includes a market piece and an economic piece. I will link to descriptions of the model later in this article.
Key skills that are shared by highly successful investors
Successful investors share a set of common skills. One is the willingness to consider both sides of an argument. When choosing to invest in a company, they give as much consideration to the bear case as the bull case.
Another key skill is humility. Don’t laugh. Humility is the notion that nobody knows for sure what will happen in the future, and a well-prepared investment thesis can go south without warning. Humility is the opposite of overconfidence, which is probably the most destructive characteristic that an investor can have. Overconfidence leads to all kinds of errors – overpaying, staying in a losing position too long, doubling-down on a losing position, and refusing to admit mistakes. How can you possibly improve as an investor if you aren’t willing to admit when you made a bone-headed decision? Humility is a valuable skill to have.
It’s my belief that the ability and willingness to get out of harm’s way when the bottom is about to fall out is one of the most valuable, if not THE most valuable skills that an investor can acquire. More on that later.
Market timing is a fool’s game
How many times have your read that market timing doesn’t work? Jumping in and out of the market at the right time is a fool’s game. And I wholeheartedly agree. In most cases the investor is making these timing decisions based on what their “gut” is telling them. There are two problems with this. First, there are many instances where a sudden and sharp drop in the market turns out to be a false signal. More often than not, the market finds its footing and resumes its upward climb to new highs.
The second problem is when to get back into the market once you’re out. This is even tougher than the decision to get out, because that one was made out of fear. Getting back in requires nerves of steel, because by definition, the market has already fallen by 10% or 15% and it’s impossible to know how much further it will fall.
That’s why market timing, based on gut feel, is a fool’s game. But market timing based on real data, interpreted by a robust methodology, is not at all a fools game.
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