The world is always evolving. Often, this change takes place at a slow and steady pace, and the changes may even go unnoticed and assimilate into the background. In such an environment, what worked yesterday may continue to work tomorrow, and for a long time. At other times, change is rapid and landscapes that were once familiar soon become almost unrecognisable overnight. Mindlessly applying a strategy that worked yesterday is unlikely to yield success tomorrow. In a divided world, the recipe for success is simple – leverage past successes when needed, and adapt when necessary. And yet, we often get it wrong.
Part of the reason for this is that change is often fleeting. A quick disruption of the equilibrium, followed by a swift return to normal. It can be difficult to tell if a development is a temporary shock to the system, or if it will have a lasting impact. Getting it wrong can be costly – sometimes, those who adapt too quickly, do die (metaphorically speaking). And, let’s be honest, change is hard work. It requires that a departure from our comfort zones, and investing hard work to find new strategies that pay off. It should then be no surprise that most people don’t like change. In behavioural economics, we even have a term for this: we call it the status quo bias.
Biases exist because there are many times when they offer a handy shortcut that saves us difficult mental work. Unfortunately, while these mental shortcuts can sometimes help, they can also hurt when applied in the wrong situation. But how do we know the difference between temporary changes and ‘sea changes’, and why do we so strongly believe that we have reached an inflection point in current markets?
For us, the answer lies in consciously evaluating conditions, rather than just blindly applying rules of thumb based on what has worked before. Research, questioning, and debate remain integral to our process, and currently we see many concerning signs for investors who try and replicate what has worked in the past.
For example, many investors have been blinded by the meteoric rise of technology shares, and it is true that there are many factors that make for a compelling technological future. But the factors that have allowed technology companies to grow so large and their share prices to rise (low interest rates played a key role), may be quite hard to replicate in the future. Possibly, markets are pricing in the continuation of a “best case” scenario, while the low hanging fruit have already been picked. From here on out, it may require much harder work for technology companies to maintain spectacular growth levels, especially when much of the spectacular growth has already drawn the benefit of a digital adoption boom, and when the future is almost certain to bring much closer regulatory scrutiny.
The plight of local fixed income investors provides another pertinent case in point. Locally, fixed income investors have often relied on real estate as a low-risk sweetener in their portfolios that allows them to outpace inflation. But a growing debt burden and a souring local environment, means that this sector is arguably more risky than it was in the past. While there still are (and always will be) opportunities for those who are willing to do the work and be selective about the real estate opportunities they include, those who blindly follow past recipes for success and simply include a blanket ‘opt in’ on the asset class, are unlikely to be rewarded quite as easily as in the past.
When the world changes, the key question for investors is whether relying on the rules of the past will serve them well, saving them time and effort, or whether this ‘lazy thinking’ will hamper their efforts. We believe the current market is signalling clear ‘breaks’ with the past – and as such new thinking, and a new strategy, may be required.