A friend joined a fund management firm recently and was amazed at how the analysts were expected to cover multiple geographical markets simultaneously, since the firm managed several Asia-Pacific funds. How was he supposed to do it, he wondered, since he previously was only familiar with the Singapore market. Indeed, was it even humanly possible for a person to cover many markets at the same time?
To me, there are three distinct aspects to developing one’s expertise and effectiveness in the stock market: depth, breadth and philosophy. Be deficient in one aspect and he will be a much less effective investor by an order of magnitude because of it.
In fact there are many analogies that I can draw between this and kungfu (which I like watching, and in the mood to indulge in today because of the movie Ip-man) so I’ll use the analogies liberally here. Depth is easiest to understand. If you master a certain kungfu style eg. Snake style or Eagle Claws (in that old Jackie Chan movie), you will know all the intricacies and be in a great position to fight all comers. Ditto for the investor who knows a market (usually his home market) or an industry really well; he will understand what drives it, the industry dynamics and cycles, the key market players etc, from which he can make money with more than even odds. This is what my friend had: depth of knowledge in the Singapore market. Often, depth of knowledge in one market can serve as a good launching pad for expansion into the next aspect — breadth — because the groundwork has been done; one knows what to look out for the second time round.
Just like the single-style kungfu expert who encounters other schools of kungfu. He will find it easier to learn them because he has the basic understanding gained from his mastery of his first kungfu style. And as this exponent encounters more and more different schools of kungfu, he gains breadth of understanding and knows their various interactions and how to deal with and counter each and every school. In the same way, breadth of knowledge of different markets will move the individual investor up another level because it will reinforce his knowledge of how sector peers in different countries operate, and relative valuations provide a guide to whether the particular stock he is holding might still be undervalued or is merely fairly-valued. Personally, I follow a “buy local, monitor global” approach given my limited time; at the same time I recognise the importance of expanding breadth, hence my “monitor global” emphasis (“My Research Routine“). Read more…