Life assigns mispricings but it always gets rerated
Triggers take Indices higher as they add to Life’s score- Weekly volatility is great as it fuels the upward trajectory of the long term chart. And then high velocity and high intensity on handful of days are truly the most contributors to your increased Life score. Those are the Triggers. Triggers are always unsettling, but you need them. Triggers make you hit a relative bottom on those handful of days. Hitting the relative bottom is great because the bounce back happens after knowing it all and knowing the root of things – the force of the rebound is then sincerely powerful. Events in the markets and around the world on handful of days act as good Triggers. Nifty 50 has yielded a CAGR of 13.7% over the last 26 years since inception, witnessing blips within the weeks and months as it moved through financial and macro economic crisis, bubble bursts, regulation changes, pandemic etc, but being linear upwards. 10 year moving average of Nifty 50 P/E has been going up inspite of all the events that have hit us.
Tail events are rare events that are highly impactful. Tail events drive everything, as says Morgan Housel.
Build Margin of safety – Balance in everything is the key– balance of conviction and fear, balance of discipline and freedom, balance in how you spend time across various vectors of life like development, social, health etc, With balance, one increases the margin of safety in Life – whatever range of outcomes life throws, you will be able to manage the same.
A portfolio should run a good mix of asset classes with low correlation amongst each other, a good mix of funds – bottom-up stock picking oriented funds looking at company related micro variables, Macro driven funds with a top down approach, Passive funds. A large portfolio should be spread across funds with various sources of return as Alpha generation, tracking market returns, absolute returns, Income oriented. A good mix of defensive and cyclical sectors is important. Portfolio of debt funds should be a good mix of accrual oriented high quality portfolios and dealing in interest rate risk too.
What to avoid – Don’t react to most things – those could be mispricings which people have adjudged to you at one point in time or you think so…they surely get corrected over time. If u react, you book a loss…you close doors with the situation or person, but if u don’t, the MTM loss (marked to market) would recover…you have kept the door open.
Edge is to be able to survive in the long term – so believe in the magic of inherent order and stay there, you will create Alpha!!
Inherent order is the optimum sequence of things which takes you to another league of perception of things as you pass through each leg of the sequence. Unless those things happen in that order, goodness from the same does not get extracted and learnings don’t come out. The key is surviving till the entire inherent order cycle of that one vector plays out. Only when one survives, can one appreciate the usefulness of the complexity in a system. Bond scare is the inherent order for ALMs of NBFCs and financial institutions to get aligned so that strong ones emerge and only those sustain. Clean up of NPAs and NPAs itself is the inherent order for a functionally more robust credit ecosystem. Rise in cost of funding is the inherent order for less leveraged ones to have an edge. The mindset you hold when you hit rock bottom is the germination ground for new thinking, renewed ecosystem and never before experienced energy.
Smart beta life- A life which is above average on key vectors like family, work, personal interests, health, social happiness etc is more satisfying than a life phenomenal in just one or two. A portfolio which accounts for expected risk, liquidity as well is a better one than a portfolio which would give a very high return in 10 years point to point but is so volatile trading in and out of negative and positive zones, that you quit in the 3rd year itself
Smart feature as Bit by Bit– Identify a thing, wrap your head around it, focus, take it up bit by bit, execute and you will be surprised what can be achieved. Decoding of a vast subject to put things into perspective, giving structure to a highly unstructured, building wealth, fitness – taking up any of it and doing it bit by bit over months and years works wonders!! SIP into your funds month on month.
Views are personal – Authored by Shaily Gang, Head-Products & Alternates, Tata Mutual Fund