The year is 1993 and Eden Gardens, Kolkata, is hosting the semi-final match of the Hero Cup, played between South Africa and India. India, batting first, posted a meek 195 on the board. South Africa initially succumbed to 145 for 7. But then, a 44-runs partnership between McMillan and Richardson left it needing just six runs off the last over. With just one over to go, India’s skipper Azharuddin could have chosen Kapil Dev, Srinath or Jadeja to bowl (established bowlers had 11 overs off the quota remaining). Instead, he asks Sachin Tendulkar, 20 years old at the time, to bowl his FIRST over of the match, and that too with South Africa requiring just six off six. Miraculously, Sachin manages to concede just three and India went on to win, not just the semi, but also the Hero Cup championship. Azharuddin was hailed as the captain with tremendous foresight.
Fast forward to 2015. The Seattle Seahawks are playing England Patriots for Super Bowl XLIX. The Seahawks, with just 26 seconds remaining (and trailing by 4 points) had the ball on second down at the opposition’s one-yard line. The easiest decision was to call for a hand-off to the running back Marshawn Lynch, one of the best running backs in NFL. Instead, coach Pete Carroll calls Russel Williams to the pass. And then the anti-climax! The Patriots intercept the ball, winning the Super Bowl moments later. Headlines next day termed Carroll’s decision the ‘worst play call’, the ‘dumbest call’ or a ‘terrible mistake.’
Fun as these stories are, the bigger question is, why were people unanimous in their hailing of Azharuddin (if you are a cricket fan, you certainly remember that Joginder Sharma over) and total condemnation of Carroll? Because, for them, the proof of the quality of their decision was solely, totally and absolutely dependent on the eventual outcome. If you have won, it MUST be because you made a good decision. And, as a corollary, if you lost, you must have made a bad one.
Taken to an extreme, no sober person thinks that getting home safely after driving drunk reflects a good decision or good driving ability. You have managed to reach safely DESPITE a bad decision to drive while drunk. And yet, companies often take business decisions solely on the basis of results. Annie Duke, author of Thinking in Bets, says that professional poker players have a word for it – Resulting. Just because they won the hand, they must have played well!
Now, as investors, we do need to ask ourselves, how many times have we resorted to Resulting? (thinking that we are smart investors, just because we made money. Or believing that an investment strategy is great, just because it led to a momentary outperformance).
The table above summarizes the 11 broad market cycles (or unequal time frame) over the past two decades. The table below is a more detailed (albeit difficult to read) data. BSE Sensex returns are compared with sectoral indices.
Take the example of the BSE Capital Goods Index. Over the past decade, this index has fallen more than the Sensex during downcycles and risen less in upcycles (barring one instance). Based on this, there is a common belief among investment managers that those are bad businesses and should not be held in the portfolio. Nevertheless, we often forget that in the previous seven years, the same index outperformed all other sectors as well as the Sensex. In fact, it clocked positive returns even during September 2000 to April 2003 during which period the Sensex had fallen 28%.
On the other end, over the past decade, the FMCG Index has been the best performing Index–rising higher than the Sensex during upcycles and falling lesser in downcycles. Consequently, there is a near consensus among fund managers that consumption is the best sector to own, because it generates high returns and it does not matter if valuations already build in assumptions that companies will find extremely difficult to meet.
As noted earlier, as prudent investors, we need to desist from resorting to Resulting. An investment strategy is not great just because it led to a momentary outperformance. To end it, this quote from Nassim Taleb rings true, “heroes are heroes because they are heroic in their behaviour, not because they won or lost.”