Be Like Water

Chris­sy and I cel­e­brat­ed our 18th anniver­sary last week­end at a two-day Wing Chun sem­i­nar. As you do.

It was run by Mas­ter Andrew Che­ung, Chief Instruc­tor of the Glob­al Tra­di­tion­al Wing Chun Kung Fu Fed­er­a­tion. His father is Grand­mas­ter William Che­ung, who trained under Ip Man in Hong Kong, and who in 1954 walked his friend, a 15-year-old Lee Jun Fan, aka Bruce Lee, into Ip Man’s school and talked the old man into tak­ing him on. Ip ini­tial­ly said no. Lee had Cau­casian blood on his moth­er’s side, and the con­ven­tion of the day was that you did­n’t teach for­eign­ers. Che­ung argued the case and won.

One of the core prin­ci­ples of Wing Chun is “don’t fight force with force”. Or, as I like to say:

Accord­ing to tra­di­tion, the art was devel­oped by two women, a Shaolin nun named Ng Mui and her stu­dent Yim Wing Chun. Whether that’s his­to­ry or leg­end is an argu­ment I’ll leave to oth­er peo­ple (but I do get into it on my Kung­fused pod­cast). The design brief is the same either way.

This is a sys­tem built for a small­er per­son fac­ing a larg­er one. You don’t get to rely on strength, because you haven’t got any. You use struc­ture, tim­ing, and your oppo­nen­t’s own momen­tum. When she push­es, you don’t push back. You turn, and let her fall into the space where you used to be.

Which brings us to the most famous thing that Bruce Lee ever said.

“Emp­ty your mind. Be form­less, shape­less, like water. Now if you put water into a cup, it becomes the cup. Put it into a teapot, it becomes the teapot. Now water can flow, or creep or drip or crash. Be water, my friend.”

Lee said that in Sep­tem­ber 1971, in an episode of the TV show Longstreet called “The Way of the Inter­cept­ing Fist”, which is what “Jeet Kune Do” (the name of the kung fu style he cre­at­ed) means in Eng­lish.

So… what does this have to do with invest­ing? I thought you’d nev­er ask…

There’s this idea in invest­ing — par­tic­u­lar­ly in val­ue invest­ing — that you should stick to your guns.

You’ve got to have CONVICTION IN YOUR BELIEFS. BUY THE DIP. DOUBLE DOWN.

If you’ve done your research and decid­ed that a stock is under­val­ued, you should buy it, regard­less of what’s hap­pen­ing to it in the mar­ket.

We say (to use a recent WORDLE selec­tion) — pshaw!

To fight the mar­ket is like fight­ing force with force. It’s one part ego, one part sunk cost fal­la­cy. “I spent a lot of time and effort decid­ing this is a good invest­ment, so damn you all to hell!”

If we have bought some­thing and the force, i e the mar­ket, is push­ing against us, we don’t push back. We flow with the force. We sell and then redi­rect that cap­i­tal into anoth­er invest­ment.

There are, of course, also prac­ti­cal rea­sons for not want­i­ng to sell some­thing you believe in. It’s time and effort. You have to pay bro­ker­age. You might have cap­i­tal gains tax impli­ca­tions. You have to spend time fig­ur­ing out what to replace it with. I remem­ber in the DARK AGES of 2022–2023 when we were in RULE 1 HELL. I get it. That sucked.

But we are real­ists. We do our research before we buy some­thing — but we aren’t mag­ic. We can’t see into the future. We can’t know every­thing about every stock, or sec­tor, or indus­try. And there are peo­ple out there who know a LOT more than we do about this or that par­tic­u­lar stock or sec­tor. If they are dri­ving the price down, whether it’s a sin­gle stock or an entire sec­tor, hey, maybe they know some­thing we don’t.

So we have rules that tell us when we should sell. Rule 1. 3PTL. Com­mod­i­ty sell. We might still be right and the mar­ket might be wrong. We might sell some­thing and then check back a few months lat­er and see it went through the roof. That hap­pens. But we’ve done back­test­ing and found that as often as it hap­pens, it hap­pens more the oth­er way — our rules get us out, and the stock keeps drop­ping.

Con­vic­tion is force. It’s a shape you com­mit to before you know what’s com­ing. Which is the exact thing Lee is telling you not to do, and the exact thing Ng Mui built a whole fight­ing sys­tem to avoid.

We don’t do con­vic­tion.

There’s no box on the QAV check­list for “how com­mit­ted are you?”. It asks whether the com­pa­ny throws off cash, whether it’s cheap against its own num­bers, whether the trend has bro­ken. It nev­er once asks what you think. In fact, it’s designed to AVOID your opin­ions. Opin­ions are bad for investors to have. Facts are far supe­ri­or to opin­ions (I tend to think this is a pret­ty good rule for life out­side of invest­ing, too).

Rule 1 is “don’t fight force with force” bolt­ed straight into the sys­tem. Down 20% and you’re out. You don’t get a vote. You don’t get to explain why the mar­ket’s got it wrong, why the the­sis is intact, why this is actu­al­ly a gift. You turn, and you let it fall into the space where you used to be.

The QAV AU Mod­el Port­fo­lio has returned about 16.1% a year since April 2019, against 7.7% for the SPDR ASX 200. Bet­ter than dou­ble the mar­ket, and you can go and check it on our web­site. Not one dol­lar of that came from a strong­ly held view. It came from rules that fire whether or not Tony and I agree with them, built by a bloke who’s been wrong plen­ty of times and designed a sys­tem that does­n’t care.

The mar­ket is always going to be big­ger than you. Don’t fight it. Re-direct the force.

Be water, my friend.

---

QAV Myth Killers is a week­ly col­umn in the QAV newslet­ter, tak­ing apart a piece of
invest­ing con­ven­tion­al wis­dom. Read the series, or
get it by email every Fri­day.

Gen­er­al advice only. Space­craft Pub­lish­ing Pty Ltd
trad­ing as QAV is a Cor­po­rate Autho­rised Rep­re­sen­ta­tive (CAR 001292718) of MF & Co.
Asset Man­age­ment Pty Ltd (AFSL 520442). This is gen­er­al infor­ma­tion and does not take your
per­son­al cir­cum­stances into account. See our
dis­clo­sure.