The CFA Society of India had recently conducted a Value Investing Summit in Delhi. Eager to listen to the best minds in the industry, I enrolled for the conference in which Mr. Raamdeo Agrawal of Motilal Oswal was one of the speakers. Mr. Agrawal in his inimitable style presented his journey as a presentation titled “From 0 to 1000 crores”.
Peppering his talk with golden nuggets from the past, Mr. Agrawal presented the picture of a perma-bull with an unshakeable faith in the India growth story. Speaking about his own personal investments since the early 1980s, Mr. Agrawal stated that 100% of his investments have always been in equity. He then went on to present a shocking graph that spoke volumes about the spunk of the man and what it has taken to bring about “from 0 to 1000 crores”. The graph charted Mr. Agrawal’s networth over a 35 year period, wherein there were at-least 2 instances, where Mr. Agrawal’s networth experienced a 2/3rd drop in value!! Can you imagine all your wealth shrinking to a third of whatever it was overnight? When someone in the audience asked Mr. Agrawal how he felt during those periods of massive drawdowns, Mr. Agrawal simply shrugged it off saying that a few of those times he had an inkling that those massive drawdowns were approaching – but he never did anything – he just did what his company’s tag line says - “sit tight”. It takes a man/woman of a unique bent of mind to tolerate these drawdowns with equanimity. Mr. Agrawal’s is in my opinion a path less trodden.
The “sit tight” mantra seems to play out very well over the long run, it certainly has so for Mr. Agrawal The question is whether the broad spectrum of investors amongst us have the mental make up to emotionally tolerate such large drawdowns. Do we have the stomach for the fight? And more importantly why? i.e why is it that we have to expose ourselves to such risks and face the possibility of such large drawdowns and experience intense moments of stomach churn? We invest to secure our financial futures, to give us a peace of mind in that our hard earned money works for us over our lifetimes and gives us a purchasing power commensurate with our earnings during our productive lives. Why should individuals endure so much stress in an endeavor that is in-fact supposed to reduce, not increase that very stress?
A second and far more insidious consequence of the stress that we endure during periods of extreme market conditions of euphoria or depression, is that our behavioral biases kick in and we take actions that are detrimental to our financial interests by selling our investments when we must be buying and buying when we should be selling. To “sit tight” as Mr. Agrawal and his company so eloquently put it, we need to be within our emotional tolerance for asset price fluctuation and this varies from individual to individual. For the likes of Mr. Agrawal it can mean being comfortable with a 66% drawdown, while for others it may be a tolerance of not more than a 5% drawdown.
To ensure we make rational choices in our investment decisions over our investment horizons, our tolerance for risk and our emotional capacity for asset price fluctuation must be assessed independently and documented. This will hopefully ensure we have a living document (in our case the Investment Policy Statement) to guide and handhold us.