“Wisdom is the best pill you take for turbulent times”
You may have been jittery about what action to take to safeguard the value of your investments when you heard about dropping market indices or, more recently, when you heard about new Covid variants. During these times of perplexity, we humans have a tendency to engage in activities that future Rational thinkers would label as "a perfect epitome of irrationality" in their books.
People in the market make such irrational judgments because of a lack of sufficient research. To give you an instance, the market's reaction after hearing about Omicron without taking into account its low severity and impact after immunization. Therefore, it is important for one to disconnect from the herd, biased news, continuous inflow of information and as Balkrushna (My partner & Founder of the company) says” When in doubt, zoom out.”
In today’s blog, I want to tell you a story of a Voyager named Khalis. To understand better, Voyageurs were a group of people whose work was to transport goods in medieval times through water. Khalis was a well-known voyager of Egypt. Even today, stories about his voyages are recounted and narrated to children. He is often remembered in folk stories and ballads of Egyptian writers.
Khalis belonged to a voyager family, his first voyage was at the age of 7. He grew up listening to brave stories of other voyageurs about their victorious battles against the pirates and the wild sea. He was calm, composed and was an excellent observer. He always carried books of Sufi stories and Mystics with him on his voyage.
It was D-day for Khalis because his father, Nasiruddin, was about to retire and hand over leadership of the ship to him. The occasion was emotional for his father, but Khalis was ecstatic because it was his maiden journey as the ship's commander. His ship had around 150 other voyageurs and was a 15-month long voyage. The route which was sanctioned to him had a place called Pausol. This place was known for its wild waves and merciless pirates. The monarch paid twice the wage as no other voyageurs group accepted to take this route. Khalis was convinced that, with his ship, leadership and his team, they would be able to get over the Pausol pass.
The expedition began on a bright sunny day from their kingdom's port, carrying cotton, spices, ammunition, jewelry, and other precious items in accordance with the bilateral trade agreement between the two kingdoms. They had enough food to get them through the entire voyage. Their daily routine called for them to row for 8 hours, beginning at 10 a.m. and ending at 6 p.m. They would then eat dinner and engage in recreational activities.
Time rushed past like sand from the fist; it had been a year aboard the ship, and everyone concluded that Pausol was a hoax designed to terrify people and that no such place existed. Everyone was overconfident and utterly dismissed the notion of Pausol, and this continued to the point that people refused to accept Khalis as their leader since he was young and kept on reminding them about the dangers of Pausol which kind of ignited a revolt among voyageurs. Khalis continuously encouraged them to stick to their daily routines and not overindulge in booze and smoke.
Khalis had an early intuition of the unavoidable lethal waves since he was well-versed in the study of stars, moon, and aquatic animal behavior. He saw something unusual among them. Then there was the full moon night, which left indelible scars on the people both physically and psychologically. At midnight they faced a rainstorm, and the rain was so intense that a person seated near them was also obscured. Cold gusts blew at great speeds, tearing the flag and bending the rode. The waves were so enormous that the items were pulled by the ship's motion induced by the waves. That night on the ship was pure mayhem, with everyone scurrying here and there to save their lives. This was a turbulent time that tested true leadership.
Khalis started honking on the ship and advised every voyageur to calm down and stand wherever they were. He first asked the people to grab the ropes of the staysail and twist it towards the north-eastern side to reduce the motion, then he ordered the luggage handlers to tie the goods to the nearest stand and then he took control of the helm. During this time many men were killed. These were the ones who did not follow the directions given by Khalis. The rains and the harsh wind pulled them over and they drowned in the sea. It was a horrific storm that was never experienced before. Out of those 150 people only 60 were saved, those 60 were the people who listened to him. After the 6 turbulent hours, people acknowledged Khalis’ vigilance and wisdom. The next sunrise was again calm and easy, but people were not the same, they developed gratitude towards Khalis and accepted him as his leader. Calm nature, Deep knowledge, prudent decision-making skills helped Khalis to save his men.
The markets and the Oceans
Let us understand what we can learn from Khalis and relate it with the market conditions. His skills, understanding of the sea and wisdom helped him to stay calm even in these turbulent times. The markets have a similar nature as the ocean. There is a bullish period, bearish period and stagnant period. Think of the story and market in this way - pulling the rope by listening to a skilled individual is similar to surviving the storm of financial markets because of expert support, running in the ship to save life resonates with panic selling and drowning in the sea is equivalent to extended losses.
The volatile times of the market will definitely seduce you to take irrational actions and decisions that you will regret later. You will want to sell the stock in anticipation of them correcting more and then buying at a lower price. The information around you will get so negative that you will believe that everyone is right and the markets are going to end tomorrow. They will be successful in introducing biased information in your mind if you don’t have the knowledge and wisdom to sustain that force.
Imparting the qualities of Khalis to smoothly ride the markets.
First quality of Khalis is his calm personality. He did not get carried away by the thinking like the herd. He sharply observed everything related to his ship and voyage. Similarly, it is never a wise decision to get carried away and sell stocks in a panic because markets are falling and similarly buy when the markets are rising without having enough knowledge of the situation. Getting immune from the herd will give you an edge, you don't have to sell because someone is selling or get influenced by someone’s wishful thinking. Everyone in pleasant times or bull markets will get overconfident as the other Voyageurs got and thought that there is no place called Pausol.
As Steven Pinker, an expert of evolutionary psychology and the computational theory of mind, explains in his books, humans have a tendency to mingle with base rate probability based on the situation around them. We, humans, are very sensitive to information and accept it without thinking over it, causing confirmation bias and impairing our decisions. It is important to ‘Zoom out’ to stay away from the herd frenzy by having an independent thought or opinion for the situation. Thinking holistically & eliminating blind spots will help you to achieve this.
Second quality is deep knowledge. Khalis knew about the sea, stars, and animals. In short, he had technical knowledge about his ship and every stakeholder. Similarly, it is important to have a deep knowledge of the stocks and the markets you are investing in. You should have an in-depth understanding of the company, from its products to policies to people. You should broadly know priorly about the things that can go wrong, including the tail risks. You should be aware of the ways which can save you from the risks, if and when they arise. For instance, we at Axanoun have developed an in-house framework that considers all the stakeholders and their effects on the business. That helps us to keep the quality of the decision making process intact. Our work then is to just go according to the framework, upon completion of which we are clear about the Business and all the stakeholders. This exercise gives us confidence in volatile times.
Also, as Khalis had confidence in his ship that it would sail through the storm, similar confidence should be on the stocks you invest in
The third quality is Prudent Decision Making. As we witnessed, Khalis did not get carried away by the situation and was instantly ready with his plan of action. Similarly, we should not get carried away in volatile markets. We have to understand that this is a part and parcel of the markets. Because it is a temporary phase, it shall pass but action taken in those times will stay on forever. Decision making is prone to bias and blindspots which in one way or another impair your decision. One can avoid them by being rational. The first step to being rational is to know the biases and the second is working on them. This can be achieved by either continuous reading or having discussions in small groups where there are people who don't agree on everything but have a common interest in finding the truth and they catch on to each other’s fallacies and blind spots which eventually leads to truth
You should focus on your ship (your stocks) and not on the sea (market) as it is not in your control. In the long term, when you ‘Zoom Out’, the fundamentally strong company sustains as a wealth creator. Be someone who Zooms Out as only long term investors have the ability to do so and this is the reason why speculators don't create wealth and long term investors do.
“When you can't become Khalis, be amongst one of his 60 voyageurs.”
(let your wealth creation journey be led by professional managers)
Mrunal Shah
(Co-Founder-Axanoun Investment Management)
To my colleagues,
Khushi Doshi & Balkrushna Vaghasia
Thank you for taking time out of your busy schedules and helping me with your ideas and inputs while writing this blog