Insights from our CEO - Aashish P Somaiyaa, Chief Executive Officer, WhiteOak Capital AMC

19th April 2023 - Aashish P. Somaiyaa

Thrive in Grey - Is the market at top or bottom?

There is a famous quote by the world’s richest investor, Warren Buffet that “Be greedy when others are fearful, be fearful when others are greedy.”

The pertinent question is - Who is the ‘others’?

Answer: The ‘others’ is us.

Drawing conclusions, giving judgements and explanations:

The reason why human beings find it difficult to operate in markets is because by nature we are deterministic rather than probabilistic. We want closures, we need explanations, we would like to judge, and we want certainty. However, stock markets are not amenable to judgements, closures, certainty, and determination.

For example, during March 2020, when covid struck us, stock markets during that time fell by ~30%-35%, people were locked up in their houses, and we quickly concluded that everything including investing is a futile exercise, and human beings are the next dinosaurs. There was a wave of pessimistic thinking that the vaccination to fight covid will not be developed immediately as it will take at least 10 years to see the light of day. Therefore, it is better to pull out money from equity markets. As you can see, we are very quick in drawing conclusions. By November 2020, equity markets started making new highs and by October 2021, the equity markets (Nifty 50) made an all-time high of 18,400. 

  • Conclusion in March 2020: - Human Beings are the next dinosaurs.
  • Conclusion in October 2021: - Human Beings are invincible.

Same is also the case with human relationships. For example, when long-standing friendships get broken, or relationship goes sour, or a top employee quits the firm etc., we like to draw a closure, love to ruminate on it and ask ourselves “why did this happen to us.” But the reality is that there is no definite reason for such occurrences and situations. 
Another example of how we are engrossed in drawing conclusions, giving judgements and explanations can be understood through the case of ‘business television’. If we follow business television, an entire empire has been built based on explanations. If markets have fallen by 2.5%, someone is always there to give a coherent explanation as to why it fell by such quantum. Infact, explanations are galore by every minute and hour of the stock markets. For instance, we will get an explanation as to why markets fell by 1.5% at 11 am, why it further fell by 2.5% at 12 pm, and why it closed by 2.5% by 3.30 pm. Next day again, there is a detailed explanation spooled out on why markets have further fallen by 2.5% and the endless saga continues.
In October 2021 ,when markets (Nifty 50) reached new highs of 18,400, India was considered to be an island of excellence, and was touted to be an oasis in the otherwise troubled world. But with all those euphoric declarations, by June 2022, equity markets had further declined to 15,200 levels. There were barrage of explanations given to justify the levels like Oil prices have soared to $125 per barrel, Russia-Ukraine war which is the biggest war the world has witnessed after second world war, Interest rates hike in the US, Repo rate hikes by the RBI, and looming recession in the world etc. Then by November 2022, markets (Nifty 50) touched a high of 18,900. 

The point to note is that while we can give multiple reasons for market movements and levels, in reality stock markets are not amenable to determination, conclusions, closures, and judgements.

Being probabilistic and not deterministic:

Let’s take case of cricket; we all avidly watch India-Pakistan matches, but how many of us see England-Australia matches with equal interest. If we are watching India-Pakistan match can we watch it with an open mind, without our emotions getting intermingled? During the match if India has one good over, we immediately draw conclusion that we will win the match. Then, further down the match, if we are two wickets down, we impulsively react by saying that we will lose the match. We make judgements that why did we take this player, this is not a great team, and doesn’t have the calibre to play in international league matches etc.  So, what happens in a typical India-Pakistan match is that in every good over, the conclusion is we will win and in every bad over, the conclusion is we will lose.
However, an England-Australia match, is watched by connoisseurs of cricket. Why do we enjoy that match as a connoisseur of cricket? We enjoy that match because we are not drawing any conclusions and watching the match with an open mind. 

Human beings find it extremely difficult to negotiate with the stock markets, because of the nature of drawing deterministic conclusions. My learnings from the stock markets thus far, in all these years has been that “you should not be deterministic; you should actually be probabilistic”.  It means keeping an open mind that this can also happen, and that can also happen, which means being open for all eventualities. 

Thus, being open, probabilistic, keeping scores but not declaring winners and losers is extremely important for being successful. 

“Be open-minded for all probabilities but be prepared for all eventualities.” 

The answer lies in “AND” and not in “OR”:

Traditional economics states that human beings are rational and logical, however those economists who have taught us that human beings are homo-economicus have awarded Nobel prize in economics to those stalwarts who have disapproved such theories. Did you know that in the last 15 years, Nobel Prize in Economics has been awarded to those people who study human behaviour and not to those who specialize in the demand and supply dynamics. 

Economics teaches us that when price falls, demand goes up and vice-versa. In reality, is this what really happens in stock markets?  Does this happen in real estate? Does this happen to demand of rolex watches, and mercedes car? 

Hence in reality, “human beings are not rational and logical, but they are emotional and psychological.”

 If I have to ask you whether USA is to our east or west in the world map? What would be your answer? In the words of wise men, the world is round, and it depends on the destination city of your travel. For example: if we board a Singapore Airlines flight and travel to San Francisco, the US is towards our east. And if we take a British Airways or United Airlines flight and reach John F Kennedy (JFK) airport in New York, it is towards our west. Similarly, in stock markets and in life there is no clear-cut answer. Hence, in both investment and in life the answer is not “OR” the answer is “AND”. 

We don’t need to get a conclusive answer for every aspect of an event or occasion.  

Stock markets are like a sine wave with the centre line inclined 45 degrees upwards:

In our profession, it very common to be asked, is markets at the top or at the bottom? We don’t care whether markets were up, down, or flat in the past, we are more concerned that if we invest today, whether we are going to make superlative returns. We want perfect answers and unfortunately people also give perfect answers. 

The job of the market is to make money out of people who give you perfect answers. For example, If I vehemently say stock markets will go up tomorrow, there is a high probability that markets will behave exactly the opposite to what I said. Stock market is like a sine wave – there is a crest followed by trough, followed by crest, and it ebbs and flows just like an ocean. Unlike in physics, where the centre line in a sine wave is a zero-degree flat line, in stock markets it is a sine wave, but the centre line is inclined 45 degrees upwards. Experts who follow technical analysis, are likely to always say that markets in the long term makes higher highs and higher lows.

We keep debating whether markets are at the top or bottom, but if we look at the long-range past markets are close to the top, and if we look at the long-range future, markets are always close to the bottom.

 So, when we are trying to make an investment decision and we are always trying to determine whether equity markets are at bottom and is it an attractive level to invest. The apt approach is rather than trying to determine whether equity markets are at bottom or not, we should instead make the decision with an open mind, and with a probabilistic thought process. We are never close to the top or bottom; it depends on the perspective from which we are looking at it. 

Being comfortable in Grey:

A point to ponder - Is business offline or online? Is it meant to be physical or digital? Byjus was supposed to be digital but now they have classrooms, Pepper fry was a digital offering, but now they have furniture stores. Hence, business is not physical or digital, business is “phygital.” 

Similarly, human life is not a black or white journey, but it resides in grey. For portfolio construction, there is a perennial debate whether we should pick value or growth stocks, defensive or cyclical stocks, large cap, or small cap stocks.  However, let’s take the example of BSE 500 index, which is a proxy to entire Indian equity market. It consists of large, mid, and small cap stocks, and comprises ~96% of the Bombay Stock Exchange (BSE) market capitalization. Hence, if this index represents the Indian equity markets in entirety, our portfolio should ideally be some reflection of it with better stock picking. Therefore, the answer is not ‘this’ or ‘that’. The answer is ‘both’, as the market has elements of everything, and we need not make binary choices. It is better to have the best from across the spectrum.  It is thus, better to be consistently correct rather being occasionally brilliant.

There is a famous quote by Rory Sutherland, renowned author and Vice-Chairman of Ogilvy and Mather group of companies that “The opposite of a good idea can also be a good idea”. 

So, there are no good or bad ideas, there are only choices.  When black and white gives us sleepless nights, we should learn to relax in grey.

For example, if we want to go out for sumptuous dinner outing with our spouse, and we are contemplating whether to eat Lebanese food or Chinese food, the answer to this is that ‘there is no right or wrong answer’. Both types of cuisines are good, it depends on our choice.

Similarly, when making business decisions or a medical diagnosis, can we make decisions with 100% of the information? In reality, most experienced people will tell us that the best decisions are made with 60% of information. In fact, if we wait to take decisions with 100% information, chances are that we are either too late, or we are wrong in assuming that we have 100% of information. 
A well acclaimed American philosopher, F. Scott Fitzgerald once made this statement that “The test of first-rate intelligence is the ability to hold two opposing ideas in mind at the same time, and still retain the ability to function.”

Concluding thoughts:

We as human beings want closure, and determinate conclusions, how-ever in markets and in life, there is no top or bottom, good or bad, right or wrong, there is only context and perspective. 

Just to reiterate “be open to all possibilities and as well anticipate all eventualities.” Often, we are juxtaposed on whether we should invest in debt or equity. The answer is, we need both, as markets are dynamic in nature. 

There are always few things where we insist on making choices, but the fact is, it is an irrelevant exercise to make the choice. The answer is not “Or” of English but “??” of Hindi.

Life is grey, so are markets, learn to thrive in grey. 

Index Source:

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