In spite of all you do, stuff happens.
In spite of all your preparation, all your planning, all your experience, mountains and markets can and will surprise you. Mountains are chaotic systems: they disrupt the airflow around them, and so they can create extreme situations, where the turbulent winds and a lack of cover transform a beautiful clear day into a massive maelstrom where there’s no shelter.
Markets are chaotic as well. That’s why the patterns we see, while perhaps reminiscent of previous market cycles, are always new. The most dangerous phrase in investing may be, “It’s different this time.” But in a very real sense, it’s always different. What makes that phrase so perilous is that it is often used to justify improper actions, that in “normal” times we would condemn as foolish.
So how do we adapt to market and mountain chaos? First, don’t panic. The surge of emotion that comes when things go wrong is rarely helpful. Second, follow the plan unless it’s obviously wrong. When the compass says to go one direction and your instincts say go the other way, follow the compass. Likewise, if the plan is to trim when a sector becomes 10% overweight, do it. It’s never easy to cut back on a winner. That’s why it’s a winner. Finally, don’t be afraid to turn back. Just because you’ve put money into a position doesn’t mean you should put more money there. Sunk costs are just that: sunk. We have to decide what to do based on current conditions, not based on what was done in the past.
Knowing that the best laid plans will have to be adapted as conditions change is important. It means you’ll be ready when things go wrong.
Douglas R. Tengdin, CFA
Chief Investment Officer