Rehasing the Q3 2022 note : Drawdowns separate men from boys
In my Q3 2022 post, I wrote about deep drawdown that investors were experiencing in the US. I believe it may be a good time to revisit this as we may be on the verge of similar one in India and possibly again in global markets due to significant uncertainty, long drawn bull markets and macro challenges in the developed economies.
It is times like these that test our fortitude and separate men from boys.
Warren had written about this few decades ago that “as a net buyer of stocks, you should cherish lower prices”. For someone in his 30s with decades of foreseeable earning power from his skills, environment like these are the best one can hope for. Infact, one must hope that such low prices stay for few years to allow one to deploy majority of his income into equities. The worst that can happen would be for the market to shoot up quickly in a quarter or 6 months not providing enough firepower to take the benefits (unless one has substantial dry powder ready to deploy now).
Times like these don’t come too often in a lifetime, and matching out one’s ability and readiness to these times is the key to long-term outperformance.
Some Thoughts on geographical diversification
Despite more and more globalization in the world today, I believe the benefits of geographical diversification are under-rated. In today’s environment, where currencies are manipulated by the governments, basing one’s assets in one geography can be risky in the long run. However, geographical diversification just for the heck of it doesn’t make sense either. It is an ideal scenario if enticing value bets can be found in multiple geographies with ample margins of safety. This prevents significant drawdown in case one market is deeply out of favour and enables you with some portion of portfolio which is on the positive side , thereby providing dry powder for rebalancing in values.
It should never be a planned theme, but you can aim this factor if you find similar enticing opportunities in different geographies to evenly balance out the regions thereby insulating you from economic and regulatory challenges in one region in the short to mid-term and enhancing your ability to bear interim pain comfortably.
Circle of Competence
The essence of investing comes down to one’s ability to value businesses, holding an independent opinion on them and our intellectual honesty in judging our ability.
There are many styles of investing, and everyone brings his own approach and comfort in valuing certain businesses. For starters, the easier businesses are the ones which generate Predictable free-cash flows. In investing, it is totally on you if you want to make your life easier or simpler. You can try to complicate things by trying to understand hard things by over-exertion and leaving higher scope of mistakes. The downside of the easy approach is that with such filters one would need to wait for long periods of time before something enticing falls into your lap. But those will be great investments, which you would have independent opinions than the street and will provide you the ability to hold for longer periods of time.
Haphazardly buying stocks with mid-level of conviction or assuming them as decent value buys will leave you dissatisfied and a worrier all the time.
To aim for great results, one’s filters and methods should allow one to do less and say yes to only screaming opportunities while allowing the rest good ones to pass through.
In essence, it always pays off to reflect the basics in challenging times and not overthink and complicate matters. This is a game where simplicity and easy approach can far outperform complexity and hard ones. Let’s aim to stay true to these principles and control our inputs.
Akhil D.
Disclaimer: The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and represent personal opinion. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.
None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund.