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Core Competencies | Portfolio Yoga

Core Competencies

We all have our area of expertise which is where we have spent much of our energies both in terms of education as well in terms of the job we do.

Charlie Munger once said and I quote

“Warren and I only look at industries and companies which we have a core competency in. Every person has to do the same thing. You have a limited amount of time and talent and you have to allocate it smartly.”

As a amateur trader / investor, its normal to jump from one strategy to another in the hope that we find the golden goose. But as we mature, both in terms of age as well as in our ability to understand things better, we concentrate our energies on what works best for us and try to make the best of the situation.

But even the professional gets swayed especially when one’s strategy is going through a tough time. Trend followers for example have’t had that much of returns in recent months even as the rest of the market seems to be having a jolly time. Value investors have doubled / quadrupled their investments while the best we seem to be able to achieve is just hanging on to our capital.

Recently, there has been a spate of discussion on my time line regarding Market Profile, a strategy that has suddenly got the limelight even as many other strategies falter. I personally too got swayed and read a introduction to Market Profile just to get a hang of it.

But does it really make sense to switch gears in the middle? Can a Veterinary Doctor switch to Dental because it seems to make more business sense?

In last one year, we saw a sway of Mid and Small Caps throwing up some crazy returns. But how many investors really have a clue as to what they are buying? How many stocks have some truly great qualities and how many are just the Mom and Pop store that got caught in the Dot Com craze?

I love twitter for the ability to connect with other people and read articles / books which they feel is worth one’s time. But when it comes to trading and results, how realistic are those in the first place? I constantly use the word “Twitter Traders” since I seldom see some one taking losses with most claiming to be making a packet. Since markets, especially derivatives, are places where one cannot win without some one else taking a loss, one wonders as to where are those losers?

Every strategy has its weakness regardless of what their ardent followers may claim, nothing is fool proof. In my own view, over the really long term, the returns of almost all strategies (those with decent expectancy) should be around the same.

So, while 2014 may have been the year for Value Investors, 2015, the year for Mean Reversion traders, 2016 may favor some other methodology. By jumping around, all one will do is miss out on all opportunities since we would never have a domain expertise to know the good from the bad and worse, miss the early juicy part while competing with others for the left overs.

Building domain expertise is a life long endeavor and honestly it is not worth the time or the effort to try and compete with all. After all, despite the fact that software engineer’s get salaries way above what other jobs pay has not meant that we all have jumped and tried to become software engineers ourselves. So, why should our way of investing / trading in markets be any different?

Food for thought?

5 Responses

  1. Deepak Shenoy says:

    Prashanth – I think we should never stop the process of discovery. If we don’t experiment and find out that the new shiny thing in town isn’t for us, then we would really be the ones that lose. We live in our cucoon of competance most of the time, and quite happily in our comfort zone. A new concept like MP can give us new context even to see our own trading systems – perhaps provide a secondary element of feedback that isn’t entirely visible where we are. It might be so good that it is better to shift to it. It might be horrible for someone’s style, which is also more information than no information.

    I personally looked at MP and realized oone thing. That it suits a style of trading that I am perhaps not very fond of – intraday. It might still be useful in a multi-day setup but I haven’t had the time to configure this in any meaningful way. And the acronyms continue to scare me liek OTM and ITM used to when I didn’t know any option concepts. But yeah, everything new is worth trying once.

    • Prashanth_admin says:

      Completely agree with you Deepak. As they say, if you never try you’ll never know. One needs to be flexible enough to learn anything that comes under one’s radar.

      But the question is, can one gain enough expertise on it within a short span of time? I believe not and unless one gains expertise, one will never risk enough to make it a worthwhile way to trade / invest.

      While I used Market Profile as a example, the same holds true for any method which we have a clue about but are never sure about whether what we are trying to do is the right thing or not.

      For example, take Value Investing. To really know, whether our model is really good, we need to go through a complete Bull and Bear cycle, but who knows how long that cycle is and whether we come out of it successfully.

      In my previous post, I wrote about Quantum being very important since otherwise its just time pass (both in Investing and Trading). When we start learning and applying new ideas, we generally risk too far that neither success or failure has not much of a total impact on our wealth.

      But how long can one continue such experimentation’s? After all, one’s own time frame (as in life) is pretty limited and one would not want to be still experimenting with what strategy is good enough to bet it all even as much of our life passes by.

      As you know, I am a strong believer in Trend following. Does it hence make more sense to spend as much time in learning whatever can help make me even better out here or should I spend time trying to learn new tricks.

      Recently in a whatsapp group, some one said that one needs to read at least 500 Annual Reports on a Annual basis. Even Buffett has spoken about reading everything there is to read on his subject.

      Most great investors / traders take their time to understand the market and try to see what fits them the most. But once they know what they like, they seldom deviate from their core competency so as to speak.

      No matter how good momentum strategies are, you will never see true blue value investors speaking about it (other than maybe grudgingly accepting that this too may work 🙂 ). They generally try and focus on adding to their existing expertise so as to make them unbeatable.

      To conclude, would it make sense for me as a Trend Follower to study the wizards who have made a name out of it or should I try to spend time learning new tricks? The answer is everything 🙂

  2. Jaishri Shankar says:

    amazing discussion. Keep these coming.

  3. anilcfa says:

    Started in market since 2003. Learned trendlines and moving averages traded on it. On a path for holygrail, Learned Elliott wave, Harmonics, VSA,…etc..etc…
    After hitting capital low, realized stop wandering, focus on what suits best. I realized, what i learned in starting, Trendlines + Moving averages, better suited for me. So now only the tag of trend follower.

    But yes, when fellow traders come up with, excellent results on MP/Harmonics/EW, it pinch us to deviate…thats the time…if one deviates, then again learning that thing and realizing that didnt suits me. But in between a good time got waste, else that time better spend, learning and honing our ow system. Most of these new traders, dont reveal there books…but trumpets their trading methods so well, that even a hardcore guy breaks his rules.

  4. shankar says:

    Youth is the time for experimentation both good and bad, because there is no real expertise / core competency there to speak of. Which is why most tech startups ( both that succeeded and failed) were run by youngsters while the old dogs looked lost. Old age is when one is comfortable with the success ( little or big) and does not like change. Now, this is for most of us, but there are some of us who like to atleast read what others have done and see if our own system can be tweaked for the better. I’m all for the 10,000 hrs expertise idea but im fine with spending time on a new idea too.

    “Value” investing works for me as it follows premise that we are all irrational and that irrationality allows other who are less irrational to benefit.

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