Risk > Returns

Great investing is never about returns

The idea of investing is never about returns. It is about doing the same thing again and again - what works for you may not work for someone else.

I see most people try to optimise for returns.

Is momentum good?

Is the past performance of these mutual funds great?

Is this stock giving you a breakout?

But the reality about investing, much like life is - nobody knows.

A lot of investing has to do with a crystal ball gazing. Is this something we feel can play out? Is this really worth punting on?

At the core tenet lies a very fundamental idea - a belief.

A belief that this will do well, a belief that this can positively play out - a belief that this will play out in the future like it played in the past.

Now, this again comes with optimism and biases. There is a bias that this happened in the past so this will play out in the future.

There is also optimism that this will do well, because it did well in the past.

It again comes back to the thought I started this post with?

Is investing about returns? It is NOT. It is NEVER.

Investing is all about belief - an optimism - which can be on account of positive or negative bias. And the only thing any investor, fund manager, asset manager, wealth manager can do is manage risk. What will happen if things hit the fan? What if there is something that will really go wrong?

In short, what are the risks? And are the risks worthwhile to look at commensurate potential rewards - if we go right.

That is ALL that matters. Do you know what the downside is? If this business goes through a rough patch, does it have enough runway to survive?

Rest, if things go well - there is disproportionate outcomes to make - provided you are willing to sit patiently on it.

There are enough number of cases where stocks have gone up 100, 1000 and even 10,000x - all of them is hindsight bias.

We are human beings and more often than not greed and fear takes the better share of our judgment - so more often than not, before a 100x, we settle for 2x, or before cutting something out at -2x, we sit on it till -20x, with the hope that it will revive.

So, what's the takeaway?

Don't chase returns, understand risks. Returns are neither in your or my hands. Returns are an outcome, not an input to great investing.

I recently took a personal finance session for the senior management at India’s largest conglomerate. Sharing a few slides on Risk and Reward for your reference -

At every level of risk, there are range of outcomes - based on which there are different return expectations.

This varies across different risk profiles, different asset classes.

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