The young Spaniard's Wimbledon win serves up a few time-tested investing principles
19-Jul-2023 •Agnisheik Chatterji
At 6:51 pm local time, Carlos Alcaraz turned hype into reality. Carlitos, as he is fondly called, proved that, unlike the next-generation players of the past, he was the real deal. (Sure, he triumphed at the US Open last year, but this win was at the hallowed lawns of Wimbledon, the Big W).
By vanquishing the hyper-elastic, modern metronomic great Novak Djokovic in the Wimbledon final, Spain's Alcaraz has brought new tidings to the tennis landscape. The sight of the 20-year-old crumpling on the SW19 greens in raptures was a sight for sore eyes and a balm for tired minds. Sore eyes because tennis fans have longed for a worthy successor for aeons. A balm for tired minds because his Wimbledon success can help us recollect some of the most fundamental - yet crucial - tenets of investing. So, let the 20-year-old's win re-emphasise a few time-tested investing principles.
"It is not easy to play against Novak (Djokovic). If someone says they are not nervous playing Djokovic, he lies," said Alacarz, soon after losing to Djokovic in the semi-finals of the French Open the previous month. Alcaraz was tied at one set apiece before developing "cramps in all body (sic)" due to the "tension of the match".
Playing Djokovic is intimidating; he has been virtually unbeatable. For the record, Djokovic had not lost a single Wimbledon Centre Court match since 2016. He had won 11 of the last 18 slams he had entered. Worse, two mini-generations of tennis - the Dmitrov/Nishikori bloc followed by the Medvedev/Tsitsipas/Zverev group - tried and mostly failed.
Taking all these into perspective, the writing was on the wall when Alcaraz was annihilated in the first set.
But, like all great unscripted shows, the pendulum swung soon after, as Alacaraz lived up to his pre-match promise to "stay calm and forget that I'm going to play a final against Novak".
That's exactly what we forget to do when the markets hit turbulence. The moment the going gets tough, we act madder than a box of frogs and make rash money decisions.
This type of action was expounded by Carl Richards in 'The Behaviour Gap: Simple Ways to Stop Doing Dumb Things with Money'. In the book, he mentions why there's a gap between an investment's returns and an investors' returns. While the reasons are multifold, one is that investors get spooked by market volatility and hastily exit their investments.
So, know your risk appetite before investing. For instance, you should put more money in equity only if you can stomach its short-term volatility. If you can't, have a lower equity allocation, maybe a 75-25 equity-debt portfolio if you are below 35.
Charles Darwin said this world was the "survival of the fittest". There's one more thing needed for survival. That's adaptability - something Alcaraz demonstrated in buckets during the Wimbledon final.
For the uninitiated, Alcaraz has a ballistic missile of a forehand. But in the first set, Djokovic favoured depth and direction over power. By choosing this tactic, he stretched his opponent to all corners of the court, giving him no chance to unload his money shot. Frustrated, the young Spaniard sprayed his forehands from tough angles, making six forehand errors in the first set.
However, by the third set, Alcaraz had adapted his game. He toned down his natural game and, like Djokovic, chose to go with the more high-percentage strokes. Alcaraz made just two unforced errors on his forehand side in the third set, while Djokovic had 12. At one point, he was out-Djokovicing Djokovic. This is when the tables turned in the match.
Similarly, we need to be very nimble-footed with our investments. This is where asset allocation comes into play.
The asset allocation technique helps spread your money across equity and debt because they have an inverse relationship. What this means is that debt usually does well when equity falls, and vice versa. This way, you don't lose money when equities/markets fall.
Therefore, by spreading your money across equity and debt, you ask it to adapt to different market conditions.
Historical data also reveal the goodness of asset allocation. For instance, in the 2008 global financial crisis, a 100 per cent equity portfolio would have sunk more than half your money, whereas a 75-25 equity-debt portfolio would have lost just a little over a third.
There are two takeaways to this: One, the gulf in losses may not seem much, but if you had a large chunk of money in the markets in 2008, the difference would be in the tens of lakhs. And two, although the losses are still substantial, a blended, adaptable portfolio is a crash-proof solution.
Alcaraz was forged on the clay courts of Tiro de Pichon (Pigeon Strike) in Spain's El Palmar village. Right from the beginning, members of the Pigeon Strike club were taken aback by Alcaraz's ability. But there were some concerns about how his drop shot-loving game would fit into professional tennis' high-grunt, high-attrition world.
Until his arrival, drop shots were a weapon of deception only to be used sparsely. In most cases, drop shots would lose you points. And that's what was happening in Sunday's showdown. Alcaraz had gone just one out of six on drop shot points in the first four sets, but won five of the next six in the biggest set of his life. That takes a helluva conviction.
Likewise, as investors, we need to know and stick to our long-term goals. Because there is no way on earth your investments will make money all the time.
Let's give you an example of this unnamed stock (astute readers may guess it correctly) and how investors with strong conviction reaped rich rewards. This stock underwent a six-year stretch when it gave negative returns, and many investors lost faith and exited from it. But, lo and behold, the stock grew 700 per cent in the next six years, handsomely rewarding the investors who had stayed put.
While this story is a one-off, and you can lose money in other cases, the point here is that if a company is of good stock, a strong conviction can precede great action. Just like it spurred young Carlitos on a windy Sunday evening in London.
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