BEWARE OF MOVING SANDS
Investments constantly compete for our attention. Everyday investors are tasked with sorting through millions of bits of information related to various assets that gravitate around them. If one asset becomes more appealing, it often gains favor with investors. Various influences can alter the dynamics of the investment landscape, redirecting investors’ interest from one opportunity to another.
Consider these real-world examples:
- The Green Wave: Growing climate awareness has funneled investments towards sustainable assets, while traditional energy sectors face divestment.
- Interest Rate Dynamics: Rising rates may benefit savers but generally spell trouble for bond investors.
- Regulatory Landscapes: The recent U.S. approval of ETFs for cryptocurrencies contrasts sharply with the outright bans in other nations.
- The Quartz Revolution: During the 70s and 80s, this technological shift shook the Swiss watchmaking industry to its core, yet paradoxically elevated the value of luxury mechanical watches.
- The Pandemic Effect: While it propelled the gaming industry to new heights, it pushed the airline sector to the brink of collapse.
That’s why it’s important to pay attention to the context surrounding an asset. Every investment opportunity lives in a “world” shaped by rules, economic conditions, and market actors. Small changes in this environment can make a big difference in whether you’ll earn or lose money.
This is where the “What Could Go Wrong?” test proves valuable. As the name suggests, it’s a critical review designed to identify the main external factors that could negatively impact your asset’s performance.
Mapping all possible factors that may affect an asset can be a daunting task. However, here are the five primary categories from which issues are most likely to arise:
- Societal Trends: Changes in public opinion or behavior can shift the demand for certain investments.
- Commercial and Economic Factors: Key drivers such as interest rates, inflation, unemployment, and consumer confidence affect market dynamics.
- Operational and Regulatory Environment: Laws and tax implications can drastically alter an asset’s attractiveness.
- Pioneering Technologies: Breakthroughs can render existing investments obsolete or create new opportunities.
- External Shocks: Events like natural disasters and geopolitical conflicts can disrupt even the best-laid plans.
To remember these five sets of factors, you can use the mnemonic SCOPE. For every factor that you put on your radar, ask yourself: What could go wrong? And what is the likelihood of this happening? Include in your growth projections any scenarios that could derail the asset’s ability to create value and maintain interest. And periodically monitor these factors, not only focusing on the obvious “elephants in the room” but also on the subtle, consistent changes within the asset’s environment.
If every indicator seems overly positive, that might warrant skepticism. However, if you have a reasonable degree of confidence that the environment surrounding the investment is likely to support its growth, then it’s worth proceeding to the next step.
And I am taking you there.