Over the past 25 years I have been a keen observer of the behaviour of asset markets and their participants. I have closely watched both the share market and the property market and have seen fortunes made, and plenty lost, in that time. When I look back over that period, a common trait of those who I have watched thrive is that they knew the difference between strategy and tactics.
The dictionary definition of strategy is “a plan of action designed to achieve a long term or overall aim”, whereas a tactic is described as “an action carefully planned to achieve a specific end”.
Both of these are important in achieving financial security but knowing the difference is equally important. The most common factor I have seen in those who have lost their wealth over this period is that they bet the majority of their money on one tactic. When they initiated that one tactic or financial move, they thought it was their strategy to financial success. There was no plan B or fall back position or alternate course. They didn’t have an overall strategy – they were just focused on the glow their short term tactic.
The strongest evidence of this usually occurs after an economic shock. In this century we saw this in 2003 as the property market peaked and interest rates rose, when the GFC hit in 2008 and when the European debt crisis surfaced in 2010-11. Those with an overall strategy used these events to their advantage whereas those focused on short term tactics were more likely to be caught out.
This commonly takes the form of holding too much debt against speculative assets at the wrong time, with insufficient cash flow to manage the situation. We saw this in 2003 in the property market when the self appointed title of “property developer” was common and their tactics were poorly timed. Then again in 2008, when heavily leveraged share market investors were presented margin calls to top up their accounts as their share values fell. Their tactic was to borrow significantly to buy into a booming share market, but their strategy was flawed because they thought it would go on forever and didn’t recognise the signs that the share market was peaking.
Everyone’s road to financial security will be different, but understanding the difference between a strategy and a tactic is a basic premise that will hopefully help you with your journey.