Aspire to be Dravid, and not Afridi: Understanding the art of long-term investing

Low-risk cricket, resilience, respect for bowlers and conditions, calmness – all these translated into making Rahul Dravid one of the most consistent run accumulators of all-time (in the toughest environments) and ultimately, a genuine match-winner.

These are universal qualities that will hold you in good stead in most aspects of life.

In investing too, one can get carried away looking for the next multi-bagger, just like Afridi did so often. The answer to long-term wealth creation is much simpler – asset allocation.

Asset Allocation

“Investing is simple, but not easy” – Warren Buffett

Related stories

Atanuu Agarrwal

Co-founder|Upside AI

• 
  Investing in stock market on your New Year resolution list? Here are 5 steps to get started
• 
  Daily Voice | Investing in a 'hot' IPO just out of FOMO can harm your portfolio, says Atanuu Agarrwa...
• 
  Asset allocation key to wealth creation for new-age investors

The reason Buffett said that is that the issue lies within. We get frustrated so often, watching a batsman chase a wide delivery or play a rash shot at the wrong time. We do the same thing with our investment portfolios.

The objective of a sound asset allocation framework should be to be to invest across multiple asset classes that are not correlated with each other. What this allows you to do it simply stay invested.

Theoretically, if you could invest and magically disappear from the face of the earth for 20 years, you could probably justify putting all your money in equities. But the issue is if 2008 happens, and equities are down ~60 percent or if Covid happens and the market crashes ~30 percent, most of us will panic and sell. Human beings are emotionally hard-wired to do the wrong thing – sell low and buy high. Here's where asset allocation helps. In 2008, if you had simply followed a simple rule and invested equally in equity, debt, and gold, your portfolio would be basically flat vs. equities that were down ~60 percent.

One of Benjamin Graham’s most useful illustrations is the personification of the stock market as “Mr. Market”. Mr. Market, an imaginary friend or business associate to every investor, offers daily prices for shares in a business. Through Mr. Market, Graham conveyed that wild gyrations/volatility in the markets are often driven by the manic or depressive emotional states of its participants.

Most of us fall prey to herd mentality (hence, the name) and let Mr. Market’s prevalent emotional state bias our decision making. In fact, a rational investor giving the opportunity and resources can even take advantage of Mr. Market’s shortcoming i.e., if Mr. Market is looking to buy hyped-up, overvalued shares, sell it to him, or vice versa.

Non-professional investors should not concern themselves with exploiting Mr. Market’s fraught emotional state. The most effective tool to compound wealth is, as Graham put it, “dollar cost averaging”. It simply means "investing a set dollar amount in the same investment at fixed intervals over time" or as it is popularly known in India – Systematic Investment Plans or SIPs.

Harnessing Technology

An equal weighted portfolio rebalanced annually is the simplest form of using an investing ‘algorithm’ or system-based investing. The thing is that every human manager will talk about investing frameworks and discipline. But humans can’t help breaking their own rules. There is always a reason for the exception. Sure enough, throw in enough ‘exceptions’ and over time the investing framework gets corroded.

This is where technology has an unfair advantage –
(i) it eliminates human bias, and
(ii) using ML/AI techniques we can parse and make dynamic decisions using millions of data points and iterations – this is simply not possible for humans to do.

John Bogle, the founder of Vanguard (which today has $7 trillion AUM), predicted in the 1970s that over the long term, humans would find it impossible to beat the index – again a very simple form of rules-based investing. Today, 1 in 3 hedge fund managers in the US use quantitative strategies. Quant AUM in China doubled to nearly $100bn in 2020.

Ultimately, the most successful investor/fund of all-time is a quant fund – Renaissance Technologies’ Medallion Fund has delivered 60 percent+ gross annual returns since the 1980s.

In conclusion, in investing, focus on maximising your average, not your strike rate – life is a test match, not a T20.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.