"Only the Paranoid Survive" Revised - Be on guard for strategic inflection points

 

Only the Paranoid Survive by the late Andy Grove, the driving force behind Intel, is a business classic that is still relevant in the current tech and macro environment. While Grove applied this wisdom to a technology company, there is value for any investor. Some of his writing may seem dated, but the premise is correct.

Beware of the "inertia of success" which for investing could be a long-term trend of equity success. It could be a good past track record based on success rules of thumb. Believing in your record as a measure of future success is dangerous. Of course, we have heard this before, "past returns is not indicative of future success", but it also applies to strategies and processes. Changes in markets require changes in assumptions and framing of problems. 

Grove believes there are strategic inflection points when the market environment changes. Unfortunately, it is unlikely there will be an announcement or a headline of an inflection point; consequently, investors must constantly be looking for these inflection points and be ready to implement a plan of action. Old beliefs may have to be jettisoned when faced with an inflection point. The goal is to be ready for change.

For example, the sanctions on Russia may represent a broader inflection point on global finance and currency markets, but it will not just happen in a day or a week. The closing of the LME nickel market may be another inflection point for metals trading, but the new order may not yet be evident. Hence, the paranoia comes from always watching for changes that can create inflection. The world tomorrow will be different from today.

There may be an inflection point and switching from growth to value. There can be an inflection point in energy policy given the Russian sanctions. There could be an inflection point toward greater inflation fighting by the Fed. These points may appear at any time, so investors must accept their possibility.

The core question is how much of an investment process should be thrown out if faced with an inflection point. Here is where I may differ with Grove. The focus should be on identification of inflection points and rapid response, but the core investment action should be well-defined and repeatable. For example, trend-following can focus on inflection points and limited inertia but have a decision plan once markets move. The paranoia comes with a willingness to adapt portfolio weighting and response to changing regulation, central bank behavior, or market structure; however, that is not the same as costly changing behavior.