Are You Investing the Test Cricket Way?

In test cricket, they say, it is important to stay at the crease and runs will flow automatically. The batsman need not be innovative or adventurous in stroke-play, but needs to show patience and perseverance for being successful. Investing is more like test cricket, rather than T20 or one-day cricket. Traits like strong foundational knowledge and patience score over aggression and street smartness for long-term wealth creation through investing. There are many other investing lessons one can learn from test cricket. Let us look at them in detail.

Controlling the urge to act

In test cricket, the temptation to play aggressive shots often results in falling of quick wickets and the team is likely to end up on the losing side. Though a batsman cannot control how the opposition bowls, he can choose how he reacts to the bowling. Some of the deliveries need to be left alone. Similarly, can we control what is happening in the market? And, can we control how we react to what is happening in the market? As far as the first question is concerned, obviously, the answer is “no”, as we do not have control as to what is happening in the market. For the second question, the answer is a “yes”, though easier said than done.

A lot has been said and written about long term investing when it comes to equities and it’s no secret that risk reduces when you stay invested in equities over a long time. Nor is it a newfound concept in the world of finance. Yet it is very common that investors give in to their temptation to act, when it is not required, and worse, against their own interest. Often these actions result in a break in the investment period. An important advice on this subject is to never stop SIPs (Systematic Investment Plans) based on market movements.

Not all players contribute equally

It is not uncommon to witness two batsmen score centuries in an innings of a test match accounting for 80% or more of the overall team score. The following test match may see different players dominating the scene. In other words, all the players do not contribute equally in a test match, and it is ok to expect a couple of failures. Such a phenomenon is common in the investment world too, with a particular asset class demonstrating good outperformance over others for a stretch of time, followed by periods of relative underperformance. The key to succeed in these circumstances is to follow diversification and adopt a portfolio approach. Even within equities, different market segments (large, mid or small caps) or different sectors outperform each other from time to time. To put it simply, winners keep changing. Since these trends are unpredictable in the short term, it is better to diversify among various asset classes at all times. Though these concepts are easy to understand, it may be difficult to practice. An easier alternative is to invest in an Asset Allocator Fund of Funds that helps to diversify your investments across equity, debt and gold.

Even in a test match (or long-term investing), one can’t be completely defensive

While it is agreed that test cricket is all about displaying patience, the batsmen need to take some amount of risks. Remember, the team that takes more runs wins, even in the test format, not the number of wickets or the amount of time spent at the crease. Similarly, a totally defensive strategy in investing too, could result in insufficient amount of wealth creation, despite patient waiting over years. Many investors completely avoid equities fearing losses and citing examples of market crashes like those that we saw in March 2020 amid the emergence of Covid-19 pandemic or the case of 2008 in the wake of Global Financial Crisis. However, risks reduce considerably in equities with longer investment horizons, with higher potential compounding. On the other hand, clinging on to certainty may result in returns that may not even beat inflation. An ideal way to start investing in equities is to initiate an SIP in a Multicap Fund or a Hybrid Equity Fund that have a potential to generate higher returns over the long term as compared to fixed income investments.

Test cricket is one of the sports with longest playing time, with a very few exceptions like sailing or cycling that are sometimes longer. However, over the years T20 cricket has gained popularity at the expense of Test cricket as the audience (especially youngsters) have preferred action-packed entertainment with shorter time frames over the format that truly tests the abilities of a player. A strikingly similar trend is currently underway in the world of investments over the last two years. There has been a chase for short term trading as indicated by the jump in new demat accounts and the craze for crypto trading. Short term thinking in investing is surely more thrilling, but our hard earned money deserves better. We are likely better off keeping our investing habits the test cricket way.

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