Oh, is that how it always happens?

Letter # 63, 10th November 2021

It’s 1988 and tennis fans were keenly watching two players, Andre Agassi, ranked at number 3 (1), and Boris Becker, ranked at number 4. By 1989, they had faced each other on three separate occasions, and Becker won all the three matches (Agassi did not win even a single set in two of those). By the end of 1989, Becker went on to occupy the number 2 spot in the ATP rankings and Agassi was pushed to number 7.

Then, something changed. They played three matches in 1990, and as if by a stroke of luck, Agassi won all three (won two matches in straight sets). In 1991, they played two more games and again, Agassi won both. During their careers, they faced each other on 14 occasions, and Becker won only four matches (just one more after three wins by 1989), and Agassi clocked … TEN. Seriously, mate, what happened?

Agassi later revealed in an interview (2) that he kept watching the tape of Becker’s service and noticed a tell. Just as Becker was about to serve, he would stick his tongue out — in the middle if he was serving up the middle and to the left if he was serving wide.

Having discovered Becker’s tell was only half the victory; resisting the temptation of reading his serve for the majority of the match and choosing the moment when he could use that information to break the game open was harder.

The learning is simple: if you are predictable, people learn to hack you. Markets teach us the same, i.e., if we are listening.

Let’s take the banking sector for example. Between December 2007 and March 2020 (12 years), Bank Nifty nearly doubled despite the COVID-induced market correction. In comparison, the Nifty only rose a meek 40%. Still, Bank Nifty outperforming the Nifty was only the side-story.

The ‘lead’ story is what led to that Bank Nifty’s stellar performance. Kotak’s stock price tripled and that of HDFC Bank quadrupled. In December 2007, the combined weight of HDFC Bank (HDFCB) and Kotak Mahindra Bank (KMB) was just 24%, whereas that of ICICI Bank (ICICIBC) and State Bank (SBIN) combined was 51%.

During the same period (Dec-07 to Mar-20), ICICIBC rose just 40%, and SBIN fell 10%. Strong asset quality controls catapulted HDFCB and KMB to pole position, while others fumbled. In turn, that led to two things.

One, weights of ‘clean’ banks increased dramatically: HDFCB and KMB rose to 44% by March 2020, and that of ICICBC and SBIN fell to 30%, i.e., delta of a whopping 21%.

Second, and more importantly, many market participants subconsciously formed the opinion that what has happened in the past would continue – i.e., HDFCB + KMB would keep gaining share. Just because they ran the bank better, markets would keep rewarding them with higher valuations.

What transpired was the exact opposite. Between March 2020 and now, the Bank Nifty has doubled again, but the composition is entirely different.

HDFCB and KMB have underperformed the index by 50%, whereas ICICIBC and SBIN have outperformed by broadly the same quantum. Consequently, HDFCB + KMB weights have fallen to 38%, and ICICBC and SBIN are quickly catching up with 36%. While they gave up 21 ppt (percentage points) of share over twelve years, they have quickly regained 5 ppt over just the last year and few months.

At the end, Agassi knew very well that if Becker found out that the ‘tell’ was made, the advantage would be lost. He could have exploited Becker’s every serve and decimated him, but the risk wasn’t worth it. A long-term win mindset does involve letting go of short-term gains.

It is similar with markets. While ‘experts’ often suggest that great companies are always great investments, historically, it hasn’t stood the test of time. The past may be a decent guide to future, but events that have not happened in the past are happening all the time now. Let data, and not heuristics, speak louder for your investment decisions.

(1) Ultimate Tennis Statistics – Rankings Table
(2) WATCH: The amazing story of how Andre Agassi read Boris Becker’s serve by watching his tongue – Tennis365


Information in this letter is not intended to be, nor should it be construed as investment, tax or legal advice, or an offer to sell, or a solicitation of any offer to make investments with Buoyant Capital. Prospective investors should rely solely on Disclosure Document filed with SEBI. Any description involving investment examples, statistical analysis or investment strategies are provided for illustration purposes only – and will not apply in all situations and may be changed at the discretion of principal officer. Certain information has been provided and/or based on third-party sources and although believed to be reliable, has not been independently verified; the investment managers make no express warranty as to its completeness or accuracy, nor can it accept responsibility for errors appearing herein.

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