Compounding Silently!

This has been a tough year for all of us in the markets. Global stocks and most major asset classes have seen a rout and the glory days of NASDAQ types seem like a distant past. Just when we thought June was the finale of this eight month downtrend, the Fed came calling and stocks tanked in unison.

India has been a major outlier but we’re now beginning to play a catch up on the way down. Over the past two weeks, we have shed over 6% on the major indices and mood has turned sombre. The experts who ran over each other trumpeting a major bull run in a decoupled India are now drowned out by the pessimists who foresee a long drawn brutal bear hug.

So what am I seeing here? Let me take an example. Anyone who has worked out in a gym or has run tracks or has seen the career of a sport legend will understand the theory of growth, reversal, plateau and growth. This means once you begin to work out in a gym, you’ll grow very fast as your body reacts to the efforts and can see a bigger bicep in a month or two. This, invariably is followed up by a phase where you’re working out harder than before but your body doesn’t move an inch. You still look the same as before and are contemplating giving up on the membership.

Once you somehow get through the grind of six odd months of no visible growth, you’ll realise you’re lifting heavier, your stamina has gone up and you can feel a change within. This is exactly when your body is preparing for the next bout of explosive growth. This process repeats itself until you hit the next plateau and so on and so forth.

What is of utmost importance in times of grind is to not give up. You can’t wake up everyday and expect your body to look better or leaner or chiseled, whichever your goal is. All you have to do is to keep compounding in silence and bide your time. You’ve to walk the extra mile, lift the extra weight and keep moving forward, and one day it’s going to be your day.

This is as true in any walk of life as in markets. Your portfolio will not always move in the way you prefer. The company can do everything right and still see its stock nosedive for every other reason one can imagine. This is not the time to sell in May and go away. You must realise that you’ve bought a minority stake in a living business and all you must do is to allow the company’s stock to play catch up with its fundamentals.

You can’t and will not beat the markets everyday, every week, every month and every year because that’s not what you’re trying to do. You’re trying to bet the fact that what you’ve bought today is going to be worth a lot more in future wherein it can go anywhere in the meantime. This is the rule of the game, period.

For all the stories of if only I’ve bought Eicher motors in 2003, the hardest part is to buy it at 2000, see it rises to 4000 and still not sell when it goes down to 1800. Everyone loves a multibagger, in hindsight. In reality, we’re all too worried about the Fed, inflation, Ukraine and elections.

We spend hours and days selecting the perfect stock for our portfolio and most of us commit to buy for the long term. On the first day of the gym, everyone pays for a yearly membership. Within three weeks, the morale begins to drop and by the end of the third month, you have everything else to blame for not continuing with the fitness plan. Similarly, in markets, everyone who was buying TCS and Infosys for ten years has chickened out because IT has ceased to be the flavour of the month.

If you look around, the euphoria of the post Covid run has fizzled out. In the office I recall, everyone around me was bullish on IEX, chemical stocks and how people just couldn’t get over the FOMO of not buying IRCTC at 2500! Those guys have now quietly moved on with a 20% drop on the portfolio and have given up on putting any more money to work till things subside. They’re not only going to miss the rally on the way up but some of them who booked their losses at 20-30 or even 40% down will be scarred forever. Worse is in store for those who thought selling out of the money options is like a money minting machine. With nifty moving 500 points overnight, they’ll be bruised badly.

This is where I will recall what Stan Druckenmiller, one of the greatest investors said what George Soros taught him- it’s not important whether you’re right or wrong. What is important is how much you win when you’re right and how little you lose when you’re wrong.

I’ll add to this by asking a follow up question. If you think your company is doing well, it has a decent growth story and a good enough runway ahead, will you not just sit quietly and let it compound because the odds are that if you’re right, the stock can easily triple in three to five years. Patience, like I’ve noted earlier is the rarest virtue in markets.

One fine day, markets will realise what you’re able to visualise and the catch up rallies are massive. You only have to see what SBI and ITC have done in the past one year or so after a decadal slump.

So here’s my two cents in conclusion. Don’t interrupt the compounding, be it in life or in markets. One day, the work done in the dark will shine the brightest. Your time will come!