Rules of the road can help navigate the share market

“How do you cope with that crazy traffic?” is one question I always get after six weeks of riding a motorbike through countries like Vietnam and Thailand.

The surprise answer is that I find the traffic patterns remarkably predictable and easy to deal with on the whole, even if they are more organic and less rules-based than riding in a Western country like Australia.

Even more surprising is that the “rules of the road’’ in Asia have a strong correlation to learning to navigate investing in the share market – probably because both are organic systems that rely on human beings interacting in ways that become second nature once you get used to them.

So here are some of my observed rules of the road harnessed from several trips to countries like Vietnam and Thailand and how they can be directly applied to the share market.

Size matters

The first and most vital rule is that size really matters.

That means if you are riding along and a bus or truck veers across the road with lights flashing and horns blaring, you need to take notice and get out of the way.

The big vehicle might be “in the wrong” by our thinking by overtaking on the wrong side of the road when there is no clear space for that manoeuvre but in Asia everybody simply moves aside to make way for the juggernaut.

On the share market it is wise to also take a similar approach and not stand in the way of the really big players.

Say, for example, you think that the days of fossil fuel are numbered and this fact has not been fully appreciated by the market as yet.

Should you follow your logic by actively shorting all of the big energy companies or should you take a more considered view and perhaps invest normally but skew your investments slightly towards companies that might benefit from the energy revolution such as lithium, copper and nickel miners or companies exposed to renewables?

I would strongly caution anybody who decides to “take on” prevailing market wisdom and stand in the way of much larger forces operating around them.

The old saying most often attributed to economist Gary Shilling that “the market can remain irrational longer than you can remain solvent’’ applies here.

It costs money to maintain a short position – particularly if the market is heading in the opposite direction – and individuals can chew through their money quite quickly if they stick with an entrenched position.

You may well be right about a future market direction in the long term but that is of little use if you burn through a big chunk of your capital in the meantime.

Maintain momentum

One of the most alarming but surprisingly safe manoeuvres you see on many Asian roads is the no look merge in which the scooter driver slows but doesn’t stop while performing a turn, assuming that the merging traffic will find a way around, past or behind the turning vehicle.

While amateurs like myself can’t resist a quick look to see what sort of situation you are about to enter, the no look merge is made possible because all road users are used to dealing with merging traffic and are happy to accommodate it.

In the same way, maintaining momentum is really important on the share market.

Real investors know that they need to always be exposed to the market, even if the size of their portfolio might track up and down due to market movements or shifts into other asset classes such as cash.

As has been demonstrated many times, some of the best returns and biggest fortunes have been earned in bear markets when assets are available at prices that are lower than they should be.

It takes courage to invest in bear markets when the future prospects appear dim and likewise to keep investing in bull markets when valuations become stretched but losing momentum is always dangerous.

Opportunities and surprises can come at any time and remaining invested at all times – even if the size of the investments might change – is the best way to recognise and seize those opportunities when they present themselves.

Use being nimble to your advantage

While it is true that all road users get out of the way of an overtaking truck or bus, being one of the small scooters or motor bikes that are forced aside has its advantages.

When there is a stoppage, all of the smaller road users are usually able to make their way to the front of the queue and be among the first to take off.

Similarly, being small and nimble means that you can backtrack against the flow of traffic – there is always room it seems for an extra lane of traffic for the smallest road users.

On the share market, being nimble is the biggest advantage of being a small investor.

Unlike the big players that can’t easily change their positions without causing prices to react – sometimes dramatically – small players are able to slip in and out of share registers without anyone really noticing.

That is particularly an advantage for investing in small companies with low trading volumes.

Don’t suffer from road rage

The key to finding order in the seemingly chaotic road conditions in countries like Vietnam is to notice that there is a complete lack of real road rage.

While it is true that horns and lights will be used frequently – particularly by the big vehicles – that is more of a statement that the vehicle is coming through than an expression of real anger or annoyance.

If someone comes to an intersection and merges with the traffic, that is acceptable to everybody and giving them room is part of the bargain and guarantees that the same will happen for you when you need it.

The same applies to breakdowns and accidents – others are quick to assist and to stay clear to ensure safe passage.

It is a marked contrast to the sometimes extreme anger shown in Western countries when a road rule is broken and is met with dangerous activities like brake checking and threatening behaviour.

Likewise, the share market is better approached with a co-operative attitude than a win at all costs one – for your own peace of mind, if nothing else.

There are times you will do well and there are times when things go really wrong but it is important to realise that there is no conspiracy at work, just a bunch of people trying to navigate a complex set of changing circumstances as best they can.

Like the road systems in Vietnam or Thailand, the market is an organic system that reacts to what is happening in real time.

Learning the “rules of the road” for the share market is a life’s work but the ride can be enjoyable and profitable.