Four decades ago, the US Army started to use the VUCA concept to refer to a more “difficult to read” world after cold war in late 80’s. This concept has been revisited many times when circumstances seemed to fuel these “difficulties to read” like 11-S, the dot com crash, the Lehman fall, the credit crunch crisis and recently, thanks to this tricky storm with a mix of a pandemic crisis, environmental stress, geopolitical issues, lack of cheap energy, 17 active wars, debt stress, inflation and a kind of a road to nowhere that seems capitalism has entered.
I’m sure that, if the VUCA concept were a market, it would have rocketed in recent years, beaten all known markets and being the more bullish market ever.
And with VUCA prices at its highest levels, we, investors, navigate through a very choppy sea, with important challenges in reading what’s going on and what we can do.
So, it could be a good idea to do the exercise about what we can do in this choppy situation, starting with what suggest the academic approach for fighting with VUCA and then, trying to translate their recommendations into our financial market’s environment.
To do that, I have entered on the Harvard Business Review website and then into the article called “What VUCA Really Means for You” by Nate Bennett and G. James Lemoine. I have extracted this information for correctly knowing what’s VUCA concept is and what we can do in each of its elements.
VOLATILITY: The challenge is unexpected or unstable and may be of unknown duration, but it’s not necessarily hard to understand; knowledge about it is often available.
Example: Prices fluctuate after a natural disaster takes a supplier off-line.
Approach: Build in slack and devote resources to preparedness, for instance, stockpile inventory or overbuy talent. These steps are typically expensive; your investment should match the risk.
My reading for investors: keep more liquidity to address future opportunities meanwhile reducing your exposure, so lowering your general risk.
UNCERTAINTY: Despite a lack of other information, the event’s basic cause and effect are known. Change is possible but not a given.
Example: A competitor’s pending product launch muddies the future of the business and the market.
Approach: invest in information – collect, interpret, and share it. This works best in conjunction with structural changes, such as adding information analysis networks, that can reduce ongoing uncertainty.
My reading for investors: I’m afraid this point seems to be specially conceived for having an important reason for being part of the eToro’s community. No need for more comments.
COMPLEXITY: The situation has many inter connected parts and variables. Some information is available or can be predicted, but the volume or nature of it can be overwhelming to process.
Example: You are doing business in many countries, all with unique regulatory environments, tariffs, and cultural values.
Approach: Restructure, bring on or develop specialists, and build up resources adequate to address the complexity.
My reading for investors: keep it simple, instead of looking into intricated and high volume information take more attention to price action and its technical analysis. You can also delegate into specialists like Popular Investors or Copy Portfolios.
AMBIGUITY: Causal relationships are completely unclear. No precedents exist; you face “unknown unknowns”
Example: You decide to move into immature or emerging markets or to launch products outside your core competencies.
Approach: Experiment. Understanding cause and effect requires generating hypotheses and testing them. Design your experiments so that lessons learned can be broadly applied.
My reading for investors: keep an ongoing education, test before doing and always learn from your own mistakes. Again, you can also delegate into specialists
Being at this point, it is time to be coherent and do what I believe, so let’s see now what I do to my own investing; my strategy has a major core that can be summarized as ADAPT TO THE SITUATION and can be interpreted as my recommendations to adapt yourself to a high VUCA environment:
Short term versus long term: I do prefer to be faster and more adaptable to ongoing situations when VUCA is high, faster ins and outs or doing faster asset allocation and exposure management.
Preponderate technical analysis versus fundamental analysis: when information is over helming and you are shortening your investment period, market sentiment analysis would preponderate over underlying or fundamental trends so technical analysis will help you better. In my case, I use the JM HURST cyclic theory and techniques.
Always use a protection: whatever the investment style you do I strongly recommend you the use of stoploss levels, it is better to cut losses instead of waiting to see if you were right or not, it doesn’t matter and nobody cares about it, but your savings will be thankful.
Look for less emotional markets: I trade forex for many reasons but probably the most important reason is that they have less emotional impact on media and investors…. If SP500 sinks 3% in a day, it will be the headline news all over the world but if we see a cross forex pair running up or down that percentage it is more unlikely that social emotions will boil and so affecting your emotions.
Reduce risk: it is of a common sense to reduce risk when “difficulties in reading” appears, I module my exposure to limit my risk to 2-3 eToro’s risk levels according to this high VUCA environment.
Don’t do intricated analysis2, it is better to concentrate your efforts in money management and to control your emotions: after more than 30 years of trading I discover that the most important aspect for having a successful story is money management and over it, emotions management, as they are fully connected and positively correlated; if you don’t manage correctly your failures you will be following a road to nowhere. In this case I find similarities between investing and tennis where the necessary element is how players manage their mistakes instead how they manage their winners.
All of this stuff and opinions can be, of course, discussed, and you may be total o partly not agree with them, but when I think about the world we are facing now and when VUCA is in its highs, a scene come recurrently to my mid, and it is that interview where we can here Bruce Lee saying that you must have to adapt yourself to the environment, as he nicely said, BE WATER MY FRIEND.
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