The trade-off between upside gains and risk of loss is important in investment
When I entered the financial industry as a young professional, India was just emerging from the balance of payment crisis, the overall confidence in the market was hit by the securities scam, and economy was still in the early stages of liberalisation. I saw the beginning of the IT era in the stock market—when a new relatively unknown company (then), Infosys, hit the market with its IPO.
As an investment professional I saw India undergo major political turmoil with four prime ministers in four years (1995-1998). I saw Indian economy get relatively isolated by the economic sanctions in 1998, and then there was the Kargil war in 1999. I saw severe droughts in early 2000s, with the 10 year yield spiking to more than 12 per cent level. I also saw the dot com bubble burst. I also witnessed the rally of 2003-2007 and led my team through the very troublesome 2008. Then of course the world saw QE I, II, III, the EU credit crisis, the Arab spring, the QE withdrawal related volatility and many more such events.
In this entire 25-year period, the equity market, despite all the odds, the whiplashes, the volatility and the gloom dooms, gave a pretty neat 11.4 per cent return Y-o-Y. And many of the fund managers of my time beat that performance by a margin, which will make the gods of investments like Warren Buffet and Peter Lynch proud.
What I have learnt is that the world will continue to swing at its own good pace. That the markets will remain unpredictable in the short term, and there is no replacement for knowledge, hard-work and skill. It may happen so very often that luck comes into play, especially in the bull market when even a speculator, a new entrant, or even a novice can outperform many well established fund managers; but only to that extent.
Luck will take the investor only some distance. It is skills and the competence that make for dependable allies. Almost everyone can lead a ship in good weather and still water, but only a good captain can predict the storm, steer the investment ship from the systemic waves and still manage to deliver the goods, even if there is a slight delay. So it is important that you do not get carried away with your luck but rather keep your eyes on the radar and the hands on the wheel.
From time to time, the stocks and the larger market will defy gravity, logic and fundamentals. It will inevitably frustrate those of us who respect risk, appreciate value, and honour quality. But the market inevitably punishes those who lose sight of these factors. So, it is important that investors do not substitute fundamentals, risk-return trade-off and sound logic for euphoria. Because markets turn. Always.
Having said that, in a bear market even the best amongst us will lose money and even the best amongst us have had to burn the midnight oil to protect value. The key here is to sustain, give your best and continue to learn from your own mistakes and others; and not repeat them. Because in the long term, the markets will reward those who can bring intelligence into action without letting emotions impair their judgement.
Intelligence is an application that runs on the operating system platform called emotions. So your intelligence may be well developed, updated and linked with the latest global information system. But, if the emotional platform interferes in the actual application of intelligence, then the output would be less than suboptimal. As investors we will never be able to avoid the primary emotion of greed and fear. But investors will need to learn to balance that. This emotion greatly interferes and influences the fund manager’s investment style and determines whether you are a success or a failure.
Another thing that I have noticed through the years is that investors do not have investment/ trading strategy or a plan. Thus they end up trading when they think they are investing, and then convert their poorly executed trades as long term investment. So, it is important that investors keep their investment portfolio and trading portfolio separate and not mix the two. Have a strategy and goal for it, and also know how much loss you are willing to assume per trade and whether the upside is worth it.
The trade-off between upside gains and risk of loss is important in investment. It is very much like boxing; you have to defend yourself against the punches of the market volatility to the best of your ability and not miss the opportunity to hit back. Even the best boxers will get hit, but then you must get up and again look to deliver your blows while defending well. The NAVs keep the count of who is scoring well: you or the benchmark.
Many new investors don’t entirely appreciate risk and thus do not cover well. They, therefore, may get punched real bad in the early days of investing. This puts off most of the early investors—2008 saw this phenomena with many retail investors throwing the towel in the ring and exiting the market. The point is, you should know how to defend and stay firm on your feet. This is a long game.
Finally, one point is evident. Investing is a long term game requiring patience, plan, competence and discipline. It requires your time, knowledge of the market and your money. This is the Eklavya way: self driven, continuously improving, self-taught and focused.
The other option is to let somebody else, who is trained, experienced, and competent to manage your investments. We believe that mutual funds are just the investment tool cut out for the job. For one of the lowest fees in the Indian investment sector, mutual funds bring to the investors the growth potential, the risk management capability, the professionalism, the high liquidity and the quality service to the investor.
For that reason, I would recommend that investors in coordination with their advisors, chalk out the long term investment strategy, and invest into equities through a mix of SIP and opportunistic investment at market dips.
Nilesh Shah
MD and CEO, Kotak Mutual Fund