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Journalism of Courage
There8217;s an old folk tale about a king who prepares his son for the throne by sending him into the jungle, repeatedly. At first, the only sounds the son can identify in the buzzing din are the roar of a lion and the cry of a wolf. Soon enough, he starts to pick up less obvious sounds, from the rustle of a snake to the flap of a butterfly. But the king says his son8217;s education won8217;t be complete until he can hear the terror in the stillness, and the hope in the sunrise. To be fit to rule, the prince must learn to hear what doesn8217;t even make a sound.
Students of the investing game also have a lot to gain by observing animals in the wild. In fact, it8217;s for a logical reason that many hedge funds have named themselves after predators, legendary investor Julian Robertson8217;s Tiger Management a known example. Laws of the jungle easily apply to the investing world and every investor aspires to be king of the wild.
If a fund manager posts negative returns in the first few months of launch, the game is over. That8217;s despite it notbeing unusual for an investor to have a poor three-to-six-month spell often caused by externalities. Much of a cub8217;s survival depends on the mother8217;s ability to conceal it well and fend off other predators who want to kill it before it starts to compete for prey. In the investing world too, it8217;s understood that someone8217;s outperformance co- mes at the cost of another8217;s under-performance.
Even after the unpredictable initial phase, there is no guarantee of survival-as the events of last week, which led to the biggest hedge-fund crisis of this decade. There8217;s much to be learned from the hunting habits of the big cats. For one, the king of the jungle knows how to conserve energy: a lion is typically inactive for two thirds of the day and focuses on going for the large kill, in line with the investing aphorism of not letting too much hard work get in the way of big ideas. Many fund managers burn themselves out by incessantly following each market zig and analysing every other zag. Getting the big picture right8217;s what matters.
It8217;s also important to appreciate that predators hunt with different styles which all yield results if they are executed well. Leopards hunt at night, stalking their prey for long hours before pouncing at the right moment. Cheetahs venture out in the day, and give a much longer chase. In the marketplace, too much time is spent on figuring out whether growth and value investing or quantitative and qualitative strategies work better. History suggests that all styles have their moments. In the long run, no one style is superior. An old market saying goes: 8220;If you don8217;t know who you are, the market is a dangerous place to find out.8221;
Predators have a high degree of self-awareness and approach the game accordingly. The key is to be comfortable in your own skin rather than imitate someone else8217;s investing style. The current fad in the hedge-fund complex is multistrategy funds where the emphasis is on scaling up by dabbling in every 8216;hot8217; area. This leads to dilution of the investment philosophy and makes it difficult to monitor the overall risk in the portfolio. One of the common reasons for the downfall of large funds is their foray into noncore areas.
Going back time and again into the African wild helps reveal what makes a successful predator. The big cats have a mind of their own, think strategically and are very self-aware. However, for every such majestic creature, there are hundreds of rather less clever wildebeests. And while we may marvel at the picture of a lion sitting atop a hill reveling in his golden mane, the chances of getting there are slim. So are the chances of staying there for long.
The writer is the co-head of global emerging markets at Morgan Stanley Investment Management.
8211;Ruchir Sharma
