No such thing as one formula to beat the market

More than 40% of the companies in the BSE500 have outperformed the index, 18% (or over 90 companies) have returned more than twice the market returns and over 27 companies have given more than 50% returns – all in just 79 trading days.

‘No one warned us. No one said you are going to lose two engines at a lower altitude than any jet in history…. No one has ever trained for an incident like that’. Tom Hanks said these famous lines in the movie ‘Sully’ – based on Captain Chesley Sullenberger who piloted US Airways Flight 1549, which had to make an emergency landing on the Hudson River.

If you thought water landings were easy, think again. At the speed of 270 kmph and at over 10,000 kg of weight, landing on water is akin to landing on concrete without wheels. The fact that this remains the only successful water landing in history is a testament to the difficulty of the act.

The cockpit voice recordings were later released as part of the investigation. Captain Sully, while attempting this unprecedented landing with literally hundreds of lives at stake, was absolutely calm and in total control. It is an immensely enviable quality to possess. How I wish that professional investors have a similar sense of calm and control while managing other people’s money.

If we look at the spread of returns for the last two years below - while the market-cap for the top five stocks has increased 57%, the bottom 200 companies have nearly halved.

The fact that a few companies were driving market performance is well documented by several commentators. What hasn’t been written about enough is, how such a severe market polarization impacts the behaviour of the market participants.

Well, we all know that ‘nothing succeeds like success’. If an investment strategy is successful, investors feel safe to keep investing in that strategy, the sales teams are happier to market those funds, and asset management companies launch funds backing this strategy. Then, the market reverses its course (all of us have been witness to Pharma and Infra funds being launched at the very peak of the market), a new investment strategy emerges, asset management companies latch on to the next big thing.

The music has essentially stopped, and investors are left holding the ball, one more time.

I see similar actions repeating in the market off-late. A few months back, strategies akin to ‘a great company run by competent management is a great investment at any price’ started gaining prominence. It was because that theory had worked wonders in the last two years, it was an ‘easy sell’ and investors also were all too happy to invest. What happens then is not very new. Since the Finance Minister unleashed corporate tax reforms, the market seems to have changed direction.

More than 40% of the companies in the BSE500 have outperformed the index, 18% (or over 90 companies) have returned more than twice the market returns and over 27 companies have given more than 50% returns – all in just 79 trading days.
In my article on 20th Oct 2019, I had written that ‘Great firm doesn’t necessarily mean great investment’. Many professional investors mistake ‘it has worked’ to mean ‘it will always work’. There is a subtle difference, and as such, reducing the science and art of investing to simple one-line formulas to beat the market does not work in the long term.

Amidst all the firepower that is aimed at researching economy and businesses, there is surprisingly little time spent by professional investment managers in staying calm, avoiding going with the flow, and doing what is right.

After all, it is a fiduciary responsibility—retail investors are trusting our combined ability to do the right thing.