Predict less and plan more to flick toward your investment goals
Last weekend I watched the Bollywood movie Soorma which revolved around its hero, hockey legend Sandeep Singh; who is more popular as ‘Flicker Singh’ for having the fastest drag flick (a scoring technique) in the world. His sharp and thoughtful coach Harry also plays a pivotal role in the movie.
During a match where India plays Pakistan, the opponents come out with a different strategy, attack Sandeep and in the process, end up injuring him. But our hero with his ‘never give up’ attitude, wants to come back and play his natural aggressive game despite some resistance from the coach to avoid a career-threatening injury.
The moment of truth arrives when India gets a penalty corner—and as usual Sandeep is ready to pass and flick for the goal and here comes the twist.
As Sandeep receives the pass, the Pakistan team rushes towards him, going by usual past experiences (that he will flick). However, at the last minute, Singh passes the ball to another team player instead of ‘flicking’ it. Left unmarked, the other player easily scores the goal, while the focus of the entire Pakistan team was on preventing just one player—Sandeep, from scoring the goal!
This was a “wow” moment for me in the movie. The team coach used his decades of wisdom to first let Sandeep go back to play and then keeping in mind the opponent’s game plan; they came up with a different, silent strategy!
Have a Plan B Always Ready
But, how do we replicate the learning from Soorma in our investment behaviour? Well, while investing, we usually go by two assumptions. One, the current environment and assumptions (as many investors start investing during such times); second that our returns will be in line with the best historical returns of the asset class.
Good investing, however, means being prepared for an environment different than what we thought and keeping a plan B ready. It also means, predict less and plan more.
Our general tendency is to invest in what yields the highest returns (as an asset class or a product in that asset class). However, successful investors actually often do the opposite. They evaluate very cautiously before investing. For example, what was the worst phase in an asset class/fund that is popular today? If that phase can be repeated what will be my behaviour? When investments did not give return and how will I defend myself—once you know this, you can reduce the risks and of course reap benefits.
In turbulent phases how do we defend and end up winning? Let’s look at history and prepare for the future. One of the most profitable phases for investing in equity funds was from 2003 to 2007 when equity diversified funds NAV went up by almost 10.25 times. At that time, India’s story of 10 per cent GDP growth was easy to extrapolate. But needless to say, it was not the right action because, extrapolation disregards cycles.
What happened was, the fund industry raised 93 per cent of its last 30 years’ worth of AUM till 2006 in the next one year. NAVs were rising fast and so was the number of new investors jumping in, to make quick returns. But then came That Day in January 2008—the worst day to invest but was perhaps the best day in terms of past returns. A lump sum investment made that day, took another six years and one month to earn zero per cent returns and another 9.5 years to earn just eight per cent per annum. In fact the next two years were worse, NAVs fell 62 per cent and 60 per cent and investors redeemed before the NAVs recovered again.
At such a time, we would have been fortunate to have a coach like Harry who instead of being masked by future 10 per cent growth assumption, would advise us to be wise and keep our eyes open to the possibility of things going wrong, helping us pass our money to asset allocation funds (not just the Hero—an equity fund) so that we could still continue our journey towards our financial goals (score that goal) and also invest using SIPs. The beauty of SIP is it neutralizes market extremes.
Asset allocation funds earned 10.5 per cent p.a tax free returns with lesser fluctuations in the same period of 9.5 years! A seemingly boring SIP in the same set of diversified funds delivered 17 per cent Compound Annual Growth Rate (CAGR) in the same period without much injury to capital, instead of just 8 per cent for a lump sum.
In the long term, there is little doubt that investing in equity can earn the best returns, yet investors who cannot foresee and live through fluctuations, should always seek the safety from owning two asset classes—equities and bonds. Further, they must use SIPs to last in the game till that penalty corner comes to score a goal.
Most of us always get excited to invest when the environment is rosy and easy! Few would invest too—but also ask what can go wrong, what are the risks to my investment, how long will my patience be tested before I earn the desired as well as “deserving” returns, and how can I use asset allocation to respect risk.
Asking all these tough questions helps build a solid approach that can make this select group qualify to join the league of good long term investors. For the rest 99 per cent, it would be very helpful to find a coach like Harry who has the experience and the expertise to define the right strategies to help them withstand short-term volatility and achieve long-term goals.
Ultimately, it boils down to a few simple things. To earn good long-term returns and respect risk. Accept that markets and returns have cycles and that what goes up will go down. Be smart: when past returns look poor, be aggressive and vice versa. Sandeep Singh controlled his temperament, respected his coach and helped win the match for India. Likewise in investing: look for a good coach who helps you understand changing future environment and prepare for it! I am sure Sandeep Singh would be applying these principles that made him India s most respected hockey star, into his investing as well. So should you!
The author is President of DSP BlackRock Investment Manager