Over the past month, my 6-year-old son and I have been learning how to solve the Rubik’s Cube – and here is something that got me thinking. It is incredibly difficult to solve the Rubik’s cube, much like navigating the complexities of investing. The cube has 43 quintillion combinations, and if you stare at it long enough, you will find it mind-boggling. Similarly, even investors with several years of experience and expertise find investing challenging.
A Rubik’s cube has multiple interconnected parts; one wrong move can take you back to square one. Investing is similar – myriad factors, such as inflation, currency, interest rates, company profits, company management, etc., hold sway over investment success, and one wrong investment decision may lead to significant losses. No wonder those who crack the code, i.e., solve the cube or become successful investors, are raised to a pedestal, and treated as geniuses.
Does this mean that if you are not a genius, all your attempts at solving the cube or investing are in vain? Fortunately, no.
Here are some parallels that I figured between investing and solving the Rubik’s cube:
Building muscle memory is essential to succeed: Practice. Practice. Practice. Solving the cube on your first try would be nearly impossible. You need to keep practising, learn tricks along the way and build muscle memory such that it eventually falls into place.
Investing world parallel: The same principle applies to investing. Investors and advisors who spend decades investing develop muscle memory that makes them better investors. Their expertise stems from having gone through similar trends multiple times over decades – and they can leverage this experience to distil noise while advising clients.
Rule-based approach: In the Rubik’s cube realm, there is a stark contrast between a structured approach—often termed ‘algos’—and haphazard, erratic steps. Unsurprisingly, the structured approach is a clear winner. These ‘algos’ offer a streamlined path, enabling swift progression through the cube’s complexities and eliminating tedious backtracking. Over time, these algorithms become ingrained, eventually becoming second nature in solving the cube.
Crafting strategic foundation: Investing success also involves a series of processes with multiple checklists, protocols, and sub-activities that can institutionalise the process of investing. Jumping between steps or being haphazard is a recipe for disaster. Steps such as creating a detailed plan or an IPS (Investment Policy Statement), focusing on asset allocation, strategy around security selection, a stringent review mechanism and being vigilant on cost, can form a foundation on which to build your investing success. For experienced advisors, these steps almost come naturally, almost like Rubik’s Algos.
Role of imagination, innovation, and honing the cutting edge
The record time to solve the cube has come down from one month (1974) to 23 seconds (1982) to today’s world record of 3.13 seconds. This staggering reduction in solve time is due to profound innovation in three areas:
a) Physical attributes of the cube, for example, drift, speed cubes, etc., b) Worldwide acceptance and availability of resources and training, and c) Intuition-driven speed-solving algos such as F2L, CFOP, ZZ.
Transformative Shifts: Pertaining to the investment landscape of India’s sophisticated investors, we are witnessing transformative changes driven by innovation, deepening of talent pools and implementation of global best practices and supportive regulations. Consider this:
Innovation: Innovation in products and platforms such as REITs, private equity, AIFs, large value funds (LVFs), are expanding the HNI and UHNI investment landscape. Investors can choose from a wide range of portfolio managers, advisors or distributors that are the ‘right fit’ for them. This rapid innovation is unlocking phenomenal opportunities for sophisticated investors.
Talent pool: Enabling regulations such as the IBC Code, RIA regulations and more lowers entry barriers for talented managers, creates a level playing field and protects the rights of investors. This opens a large segment of the talent pool which looks at investing as a viable career – leading to greater innovation and better investment frameworks – a virtuous cycle!
Global best practices: India is embracing global best practices across Mutual Funds, PMS, AIF and RIA regulations. Through the GIFT City initiative, we are becoming a jurisdiction of choice, both for Indian investors to access foreign markets or for foreigners to invest in India. Not surprisingly, we are seeing ever-increasing flows into financial investments from across the ecosystem, including mature investors such as family offices and institutions.
Although there is no hidden formula for mastering the game, adhering to a consistent and disciplined approach can be the key to attaining the ultimate prize in both conquering the cube and excelling in the art of investing.
Himadri Chatterjee, Head, Advisory & Key Clients Group, 360 ONE Wealth
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Walter Schloss, an iconic American investor, garnered significant success through his adoption of the value investing methodology. A dedicated follower of Benjamin Graham, the pioneer of value investing, Schloss’s investment strategies continue to be scrutinized and implemented by contemporary investors.
Walter Schloss gained invaluable experience while working directly with Graham at Graham-Newman Corp. in the 1950s. During this time, he absorbed Graham’s principles of value investing, laying the groundwork for his successful approach.
In 1955, Schloss initiated his investment partnership, initially managing funds for family and friends. Remaining steadfast in his commitment to value investing, he consistently produced impressive returns over the ensuing years.
Over 45 years, Walter J. Schloss Associates achieved an average annual return of 15.3%, surpassing the S&P 500’s 10.5% return. This outstanding performance solidified Schloss’s status as a master of value investing. His inclination to invest in smaller, overlooked companies resulted in several hidden gems in his portfolio. Notable triumphs include the 50-fold return from Blue Chip Stamps and the tenfold growth of Emerson Radio.
Below are some fundamental tenets of Walter Schloss’s investment philosophy:
Concentrate on underpriced stocks
Schloss advocated for acquiring stocks that were trading well below their intrinsic value. He employed various metrics, including the price-to-book ratio, price-to-earnings ratio, and dividend yield, to pinpoint undervalued stocks.
Schloss transcended mere metrics to gain a profound comprehension of a company’s intrinsic value. He scrupulously delved into annual reports, industry publications, and personally visited companies to acquire firsthand insight into their operations and prospects. In his assessment of potential investments, Schloss took into account factors such as management quality, brand strength, competitive advantages, and the broader economic climate. Unafraid to swim against the current, he invested in stocks that were unpopular and overlooked by others. Schloss’s independent analysis enabled him to uncover hidden gems ahead of the crowd.
Exercise patience and maintain discipline
Schloss, as a long-term investor, advocated for the practice of holding onto stocks for extended periods. He displayed no hesitation in waiting for his investments to mature, even if it required enduring phases of market volatility.
Schloss became renowned for dismissing short-term market fluctuations, steadfastly refusing to let daily or quarterly swings sway his investment decisions. He comprehended the potential for emotional mistakes and straying from a solid, long-term strategy when fixating on the market’s daily gyrations.
Throughout his investing career, Schloss confronted multiple market crashes and periods of intense volatility. Yet, his unshakeable confidence in his research and the intrinsic value of his holdings enabled him to remain composed and weather the storms. Recognizing that short-term downturns often presented opportunities for patient investors, he maintained his calm approach.
Through the discipline of holding onto his investments for the long term, Schloss harnessed the power of compounding, where earnings were reinvested and grew exponentially over time. This approach resulted in significantly higher returns compared to frequent trading activities.
Implement portfolio diversification
Schloss adhered to the principle of distributing his investments across a diverse array of stocks to mitigate risk. Typically, he maintained a portfolio comprising 50 to 100 stocks.
Diversification played a crucial role in Walter Schloss’s investment strategy. By maintaining a variety of stocks spanning different sectors and industries, Schloss effectively mitigated the impact of any individual company’s underperformance on his overall portfolio. This method shielded him from scenarios where the weakness of a single investment could adversely affect the entire collection.
The practice of holding a diversified portfolio enabled Schloss to explore a broader range, enhancing the likelihood of discovering hidden gems in overlooked sectors or smaller companies. This diversified approach expanded his access to potential sources of alpha, representing excess returns beyond the market average.
Diversification played a role in helping Schloss navigate emotional biases that could impact investment decisions. With his investments spread across various holdings, he reduced the likelihood of becoming excessively attached to any particular stock, thus mitigating the potential for making irrational choices driven by emotions such as hope or fear.
Maintain emotional composure
Schloss exemplified a composed and rational approach to investing, steering clear of succumbing to his emotions. He steered away from impulsive decisions, remaining steadfast in adhering to his established investment plan.
Schloss acknowledged the significant influence of emotions on investment decisions. He proactively countered emotions such as greed during market highs and fear during downturns, adhering to his carefully crafted investment plan and avoiding impulsive reactions.
He disregarded the emotional manipulation often prevalent in financial news and market commentary. Instead, Schloss prioritized hard data, extensive research, and his analysis to make decisions grounded in information rather than emotional knee-jerk reactions.
Embracing a long-term investment horizon, Schloss distanced himself from daily market fluctuations and emotional rollercoasters. This perspective enabled him to make informed decisions based on fundamentals rather than succumbing to short-term anxieties.
Walter Schloss’s impact reaches well beyond his remarkable individual returns. His legacy is rooted in enduring success and a commitment to disciplined value investing. The principles he espoused, emphasizing long-term and disciplined approaches to value investing, retain their relevance and provide valuable lessons for investors at all levels of experience. Whether you’re a seasoned investor or a novice, delving into Schloss’s approach can furnish valuable guidance.
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