Market superpower: Understand your game

This article is authored by Prabhakar Kudva, director and one of the co-founders of Samvitti Capital.

There are fifty different ways to make and lose money in the markets. We keep looking for the best strategies for the lot and keep switching from one strategy to the next. We go from one book to another, one workshop to another and one webinar to another in search of that one strategy that will be their money-making machine. When the said strategy stops working as well as it did - because the underlying market structure changed - the search for the next strategy begins. Call it the hedonic treadmill of strategy.

We do this, not just with strategies, but with fund managers, mutual funds, asset classes and much more.

However, if you study successful investors or traders, they all have one thing in common. They have chosen a very simple strategy and what has made them successful is not the strategy but the masterful execution of the same. The secret sauce is not the strategy, but the mastery over executing it across market environments. The art so to speak is in the discipline of focus, execution and refinement of the chosen strategy.

This is precisely why you may read Warren Buffet’s letters, Peter Lynch’s books and Jesse Livermore’s memoirs or attend our own options wizards’ workshops  - they will lay out the strategy threadbare for you - and they all have - but you won’t be able to make consistent money from any of it. Why? Same reason why as a sports professional you can’t play cricket one month, hockey the next and football the next and hope to achieve anything worthwhile.

It took me many years to realise that the way to mastery in the markets is quite simple. There are three steps:

1. Understand your game.
2. Stick to your game.
3. Refine your execution of the game.

Once you do this, once you have this clarity of thought - out of the hundred different ways to make money in the market I have chosen this one particular way and just put all your focus on just refining it day after day, you will be a 10x better investor.

Let’s say you pick the Warren Buffett way of investing - put simply - buy good businesses at reasonable prices and hold them for as long as they remain good businesses. A very simple statement indeed. But what you need to do next is:

1. Understand your game - It’s quite simple to understand “the game” but you need to make it “your game” - a subtle but very important difference - you should know in your bones when will this strategy work, what are the pain points of this strategy and how will you deal with it. Every aspect of the strategy needs to be understood. The why, the when, the how and the works. Only this will allow you to stay the course and reap the benefits of the strategy.
2. Stick to your game - The most important step is to avoid strategy hopping. If you have done the above step well, you will know that while you are an expert at your strategy, you are a novice no-nothing at another new strategy. You have to start from scratch, put in the years, and pay the tuition - so as things stand the probability of making money is highest when you stick to your game and not a “new game”. If you’re on FinTwit (as most readers will be) the possibility of your strategy jumping is very high so you should stay on guard more so.
3. Refine your game - This is the step where legends are made. Every simple strategy will have several variations and nuances. If you ask the legends, how they execute flawlessly, they won't be able to put it in a formula - this is the intuitive muscle so to speak that gets developed over time as you spend time with a strategy, play with the boundaries and refine it and then refine it some more.

If you ask Sachin Tendulkar to teach someone to bat like him for a billion dollars, he won't be able to. The intuitive muscle can't be transferred. That’s why the master traders are 10x or even 100x better than the students who take their workshops. You may take Buffett’s strategy and build your own variations into it which will work only for your personality and no one else. Step 3 is where the real magic happens. This is often why the best investors are in their 50s because it takes time, experience and reflection to build this intuitive muscle.

Most investors will do so much better just by getting step 1 and step 2 in place. Understanding this on an intellectual level is easy. But really understanding this in your bones, takes a decade in the market.

Once you do this you will also see how stupid the fights on social media are. Value works, Quality works, Momentum works, Option buying works, Options selling works, Cyclical works. Everything works when you focus on it, stick to it and refine it for yourself. So please don’t tell everyone that just because someone is buying quality at any price they are doomed to fail or if someone is buying cyclicals they won’t ever make money.

There are nuances to every strategy that can’t be justified over a social media debate. Those who buy quality even at seemingly high PEs have enjoyed the upsides and it’s their responsibility to know and endure the downsides of their strategy. They might make no money for a stretch of 2-3 years - that’s ok. In spite of that if they make 15 per cent CAGR over five years they should be significantly better off than those whose only strategy is to change strategies by the season.

But if you start off as a quality investor and shift to cyclical mid way well because it’s the commodity super-cycle you are doomed to not do well as the expert cyclical investors who have devoted their lives to this form of investing, will take you for a ride. What worked in quality companies will not work in cyclicals. It’s a different game. Just this understanding is worth its weight in bitcoin (er, gold)!

In conclusion, if you want to skip multiple levels up in your investing or trading - focus on finding what strategy resonates for you, commit wholeheartedly to the strategy and understand it threadbare and refine it forever. Each of these steps may take a few years at a time and the third step will continue for a lifetime. You will be significantly better off picking one game and devoting your energies to mastering it than you play ten different games and stay a hobbyist.

Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ. –