Chance, Choice & Crises
In order to move forward you have to look back – Matt Maher.
It feels like a crisis. Again. A Pandemic is spreading across the world. A few billion people across continents are under a lockdown. Not something I ever anticipated or expected. I thank my stars for my privilege of being able to work from home in the organized sector. It is always hard to know what the future holds and today the haze over the future is dense. I decided to go back and look at the past.
In a way my career was shaped by a crisis right at the start. I reported to my first job in June 1992 after finishing my MBA earlier that year. I was looking forward to a role in the markets but the stock market and the banking sector were in turmoil. When I reported to work, the Sensex had dropped 35% from its peak in April 1992. I was posted to the division that sold car loans. But in retrospect I am grateful - if not for this role I would never have learnt anything about sales. Through a fortuitous set of circumstances I moved to an investing role two years later.
This role started out in what was a bullish phase. At its peak in September 1994 the market had gained over 38% year to date. Midcap stocks were the stars led by large scale foreign buying and many valuations were justified based on the low penetration rates in India relative to trends elsewhere. From the peak in September 1994 there was a torrid phase that lasted as much as 9 year, depending on how you count it. I wrote about this period in an article published in 2013 - To my teacher the stock market:
I started out in the equity markets in June 1994. I could not have timed it better—it was the start of a long summer; in April 2003, the market was 23% lower than when I started out. Yes, the long term can be quite long in equities. But I learnt a valuable lesson—companies that allocate capital efficiently and earn a healthy return on capital are more likely to survive and create wealth over the long term. It also taught me a not so obvious lesson—individual stocks can be big winners even during trying circumstances for the aggregate market. Many companies created tremendous value during that period even as the market lost ground. So it is ok to be worried about the market and also be positive about a company. Respect this distinction.
The next major market meltdown in 2001 was very personal. Again. Things were going along smoothly in 1999-2000. I was part of young company building one of India’s first online broking platforms. We had received venture capital funding from some A list players at that time. As a member of the core management team I had options in the company. My personal investment portfolio went up 5x during the boom period and was 5x my annual income at that point. Almost all my wealth was in equities. Then came the crash in the markets starting March 2000. Not everything was bad though -my older child was born in May 2000. Business became tough as revenues dropped. My wife decided to drop out of a corporate role in late 2000. We had swiftly moved from being DINKs (Double Income No Kids) to a single income and one child. Then my parents, with whom I was living, announced that they would relocate to another city in the middle of 2001, which meant I now had to rent a house.
In February 2001 the Ketan Parekh episode broke out which led to another sharp leg down in the markets and for the business. Serious differences broke out about the way forward for the fledgling organization. By June 2001 it was the end of the road for me at the company. There has never been a worse moment in my life than when I had to convey to my team that many of them would be affected as well. As for the market - at the low point that year my portfolio had dropped 80% from its peak and the options were worthless. And I needed a job.
The 2001 meltdown taught me asset allocation - I could not stomach the volatility of being100% in equities. I also realized that in my role I needed the security of a house. A home for me and my family; never at any risk due to the markets or my job. It was also a brutal reminder of the dangers of leverage as I witnessed clients who had pyramided their fortunes in the bull market of 2000 lose that and more during the meltdown as the cycle reversed.
The GFC of 2008 turned out very different. I had just joined a new, yet to be licensed Asset Management company. When the crisis erupted, we had no clients and no assets. August to October 2008 was brutal with the Nifty dropping over 50%. Then in the space of a weekend in late 2008 our company ended up acquiring another Asset management company on attractive terms. Somebody else’s crisis was our opportunity.
The crisis in 2008 felt like the end of the world if you worked in the financial sector. Names that we considered Blue chips vanished overnight- laid low by excessive risk taking and faulty models. Just like today there was a haze of uncertainty about the future. Today it is conventional wisdom that the unconventional monetary policies by central banks and government interventions got the economy back on its feet and drove a decade long bull market in equities. But in 2009 that was not the consensus view. At that point both main street and markets greeted the actions of the US Federal reserve with skepticism. But when valuations are cheap and where fiscal policy and monetary policy is accommodative the odds are favorable for long term investment. That is my simple narrative for the decade after the GFC. Unlike in 2001 the options I had in the Asset Management company subsequently created value.
Looking back, I feel the imprint professionally and personally of every crisis that has shaped my career and my journey as investor. Market meltdowns and crises are not everyday events, but you will encounter them in your career in the markets and as an investor. You don’t get to know before a crisis happens, but you can be prepared and learn from it. Don’t ever let go of your asset allocation plan and avoid leverage like the plague. All investing choices are personal to you and your situation only. Don’t be surprised to find yourself bleeding when the sirens are blaring and there is blood in the streets. Every crisis brings forth challenges but could also be an opportunity. But you must have the financial wherewithal to act when the opportunity presents itself.
So what is 2020 going to be? I promise to come back and report in due course. Meanwhile I leave you with this thought.
Life is a mixture of chance and choice. Chance can be thought of as the cards you are dealt in life. Choice is how you play them – Edward Thorp.
An edited shorter version was published in Mint on 12th of April 2020
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