It's not the tools you useIt's not the tools you use

Welcome to election month! Before it starts, here’s our performance as of May 2024:

Not too shabby, as a friend used to say, who’s inspired by British serials, where a plane hijack is referred to as a “situation”. But understatements of performance are important, because the markets will make you humble the worst way possible. Hubris is a liability. So yeah, we’re ok for now. 

I watched this little “short” video on a badminton players practising a few shots, and then he turns around and shows his racket which has just four strings.

Of course, there are so many edits that you probably don’t want to believe he got all his shots right the first time, but there’s a greater story here. That is Lin Dan, possibly the greatest badminton player ever, who’s won the Olympic gold, the World Cup, the Thomas Cup and many other titles. 

The point is: his greatness wasn’t about the racquet he used. 

You could give Lin Dan an ordinary racquet and he’d beat most players that were using super-awesome expensive light racquets. It’s obvious, in retrospect. Like Dhoni would be better with an ordinary bat, than most others who care so much about English willow versus Kashmir and so on.

We believe, intrinsically, that people are skilled because of the tools they use. That a piano player would just automatically get better if he had a more expensive piano. That a better computer can make anyone a better programmer. That a better shoe will let you run longer or faster. 

At a certain point, these aspects are true. For people with enormous amounts of skill, the shoes, the rackets and the pianos do make a difference. But to a large extent, the skill is what really makes it happen, not the tools.

What’s the point, you might think, that Deepak is trying to make in an investment letter? Investing is at some level, a skill too. We think that “sophisticated” investors have so much more information, computing power, contacts and all the “tools” that they have a huge advantage and that’s what makes them money.. 

But it’s often that sophisticated investors fall prey to the same behaviour that regular people do - the herd mentality of buying into a stock because everyone else is, the acting in fear of oh-wait-the-markets-will-crash, the selling a stock too early or too late, and so on.

It’s never about the tools. It’s mostly about the discipline, the rigour, the muscle memory and the ability to deal with tough situations with a calm mind. This is true of most sports. And it’s true of investing too, in a way. A robot might, for example, do brilliantly in terms of shooting a basketball from different distances. But introduce it to a game with humans, who might decide to arbitrarily step on  your toes just before you jump, and the robots will tend to ‘underperform’. When the going gets tough, it takes more than robots to get through. 

They say AI will take our jobs, and indeed they’ll take the most boring things away. Calculating XIRR? Sure, a computer can do it better, faster and more accurately than humans. So that job’s gone. 

But it’s different thing when a person comes you and says “I don’t mind a little risk at all, I can take it”, and your response is: 

“Have you seen a deep market drawdown before? Like 2008?”

“I was in college in 2008, but I read all the news”

“Okay, experience by induction, you mean?”

“What’s that?”

“You feel it because someone else felt it and you were somehow in contact with them”

“Yes. I get the risk. I can take upto a 30% fall, no problem.”

What this person is telling you is: “I want the upside, but I don’t want the downside, not even for one month”, because they haven’t felt it by themselves and when they do, even 10% down will be horrible. You don’t want to let them go “all-in” just yet. 

Or that a promoter tells you they’ll double their profits in three years is one thing. That you inherently know, from the body language or the stage of bull market, or indeed the stage of bullshitting that is going on, that the promoter’s trying to wash his hands in the flowing Ganga, so to speak. 

The human skill in differentiating between the real from the “illustration”. And this skill isn’t reserved for people in suits; unlike in sports, anyone can be a good investor. In fact, anyone can be a really bad investor, including someone who has been a good investor.

I will, as always, digress into animation movie dialogues. This one’s from Ratatouille, a movie about a rat that learns how to cook. A food critic, who is more into pedigree than sheer talent, says this at the very end, after eating a phenomenal meal that he discovered was cooked by that little rat:

In the past, I have made no secret of my disdain for Chef Gusteau's famous motto, "Anyone can cook." But I realize, only now do I truly understand what he meant. Not everyone can become a great artist; but a great artist *can* come from *anywhere*.

A great investor can, too. You don’t need degrees. You don’t need the AI. You need street smarts and the ability to tell BS from the real stuff. But when you have that, the AI can help.

One day AI will end up doing a lot of the heavy lifting even in the analysis of sentiment and all that, and getting enough of it wrong so that us humans still have an edge, in the long term. In the very short term (high frequency trading or such) the machines have an edge because it’s a game of speed, not as much about the softer things.

So I’ll leave you here with the amazing election madness ahead of us. Or behind us, based on when you read this. We’ve been heavily long into this event, mostly because we know we don’t know what will happen. Regardless, we believe that it’s better to be more responsive. My experience tells me just one thing: there has been way too much caution, at least in May, in investors’ minds. The real fear, to me, is when everyone’s bullish. The AI will probably not tell you that.  

If you haven’t already watched it, do have a look at a detailed talk about Capitalmind’s Adaptive Momentum in our podcast at https://www.capitalmind.in/podcasts/podcast-ep-76-momentum-investing-in-india-with-anoop-vijaykumar. 

Enjoy the rains in June!

Avoiding the psephology,

Deepak