The secret of getting ahead is getting started, said American writer Mark Twain.
But, he left something unsaid that is far more important from an investing perspective; once "started", the key is "staying put".
Like the proverbial Zen paradox, the best way to move ahead is to stand still.Switching strategies (from value to momentum or vice-versa or from small to large-cap etc.) to suit the flavour of the season is a recipe for disaster, especially in the investing world. Rolling stones hardly gather moss. In stillness, there is greater dynamism.
Value Is Dead, Long Live Value
In 2017, at the peak of the bull market for smallcaps, value investing was applauded as a glorified virtue. Through 2018 to 2020, in the bear market (in small and midcaps), it was vilified as a vice.
Now, as the search for the next smallcap winner gathering gusto, the tide is turning again for "Value". In every cycle, it is natural to get tempted to switch sides based on the tides.
More so, because it sounds very logical and profound to tame the tides by switching loyalties. Such switches may look smart in the short-run, but takes a heavy toll in the overall long-term returns.
This is because the tide is so swift and fast when it turns, one ends up always late when switching. Also, only in hindsight one will know if the cycle had actually turned or not.
The easier thing to do is to stay the put to get the most out of the eventual turn, though it is harder to execute emotionally.
Switching strategies would have worked in the markets if the navigation is through a rearview mirror. Unfortunately, investing is all about driving forward through an often hazy windshield.
Let us look at the live case of the 2018-20 smallcap cycle to illustrate this point. The smallcap index made a bottom after two long years in a bear market in late March 2020 on the onset of pandemic lockdown.
At that time, the already emerging consensus trade of “quit smallcaps and move into largecaps” got further ammunition in the form of COVID-19.
It appealed to the logic of even seasoned investors who had seen multiple cycles. Panic selling followed in smallcaps. And as history has suggested when everyone quits, cycle bottoms, and turns.
Post-March, on year-to-date, Nifty added about 50 percent, while the smallcap index is up by nearly 70 pecent from March lows. This differential return is likely to be much bigger in individual cases, as rarely anyone does instant switching.
Instead of clinical switching, one often ends up trying to out-smart/time the market. This adds heavily to the switching costs and thereby results in a much higher differential than indicated by the indices performance given above.
It doesn’t stop here.
If the smallcaps continue this out-performance (which it generally does for a reasonable time after the tide turns, as seen in past cycles), this prescient, yet misguided switching would have made a huge hole in investors' returns over time.
When a strategy under-performs for a very long time, the biggest pressure point for the fund managers and investors comes precisely at a point when the cycle is about to turn. For us, such a pivotal point came in March-April.
In the investor calls during that time, many questioned our prudence on sticking to a failing strategy. Now the same investors are happy that we stuck to it.
Questions will quickly turn now to why we couldn’t be more aggressive in allocations. Such time is not far away.
No better time than now to revisit what we wrote in our client communication in the month of March. It connects so well to the essence of this piece.
“To borrow a phrase from one of the seasoned stock pickers, value investors are like a group of beasts now that is being hunted to extinction. Why? It is not difficult to fathom the reasons."
Value as a strategy has been under-performing for an extended period of time since early 2018, because of flight to safety and polarised market dynamics.
Even the last man standing out is being tested for his tenacity. Should the last few standing be worried? No. If one sets the clock back and look at the past two decades, one would find that neither this narrative (that value investing is dead) is new nor is the crowded trade in quality. There has been only one thing that has been constant across cycles -every strategy has a day under the sun and the only thing that has always worked all the time is “reversion to mean”. It is a question of time before the market takes fancy to value, though it is difficult to predict the time of the turn.
Seasoned investors understand that every strategy has its time of out-performance and has its time of under-performance.
The key is to stick to a strategy and not to flirt around with the flavour of the season. Stay the course to smell the roses, however hard one is being hounded.
(ArunaGiri N, Founder CEO & Fund Manager of TrustLine Holdings Pvt Ltd)Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.