Riding Through Uncertainty

October 7, Saturday, 2023: More than 30 cyclists began their journey from Badagera, ascending the Western Ghats toward a remote resort in Wayanad. The predominantly uphill route presented significant challenges. Nevertheless, reaching the resort by sunset was rewarding due to the striking natural scenery. 

October 7, 2023, is also memorable for a world event: the day when the pride of Israel,  one of the world’s most protected nations, was busted, and a series of coordinated armed incursions happened on its southern border by Hamas and its operators. Their mission was highly successful. It left more than 1100 Israelis dead, and Hamas had successfully volleyed more than 4300 rockets into Israel. The day was labelled the bloodiest in Israel’s history and the deadliest for Jews since the Holocaust. This set the stage for long, prolonged military operations that have continued to date. This has dragged multiple nations and has drawn a huge loss of life and property all across the Middle East. This might even engulf the whole world in a recession, as today’s war situation suggests. 

Following October 7, 2023, global stock markets declined by approximately 3% in US dollar terms, marking the third consecutive month of losses. Subsequent market volatility was influenced by the conflict in the Middle East, persistent inflation, and elevated bond yields. 

Unlike other financial activities, stock market operations mean different things to different people: some invest based on sentiment, others on value, growth prospects, or long-term narratives, while some simply follow the market through indexing. Then there are derivatives—one of the most esoteric games in finance—where you don’t own the asset itself but trade a contract linked to its price. For a true stock market investor, the daily closing price matters little because the philosophy is to invest in companies and their businesses, not just the market.

On October 6, 2023 (the last trading day before October 7), global stock markets had closed higher, led by strong gains in U.S. indexes. The Nasdaq shot up as technology stocks rallied, while the Dow Jones Industrial Average and the S&P 500 also finished in positive territory. No one saw October 7th on October 6th, and they knew that the period ahead would hold challenging days for them. We can call this the real uncertainty that awaits every market and every human activity. 

Humans have learned to hedge stock market uncertainty through various instruments. Derivatives are at the core of these hedging mechanisms. But history has repeatedly shown that derivatives themselves can become destabilising forces in times of major volatility. So, what lessons can we draw from this?

Howard Stanley Marks, the U.S. investor and co-founder and co-chairman of Oaktree Capital Management, has shared five critical ideas in conversation with William Green. These are worth reflecting on for anyone seeking perspective on investing:

(1) It is important to admit that we cannot predict or control the future.

(2) It is beneficial to study the patterns of the past and use them as a rough guide to what would happen next.

(3) It is inevitable that cycles will reverse and all reckless excess will be punished.

(4) It is possible to turn cyclicality to our advantage by behaving countercyclically.

(5) Humility, skepticism, and prudence are needed to achieve long-term financial success in an uncertain world. 

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The next day, after the Hamas incursions, I left the beauty of Wayanad and returned to the marketplace of life, realising that the one enduring lesson for both the stock market and life is that everything is impermanent.   

The sooner I accept this fact, the less I suffer in life.

FINE