Risk and the Pursuit of Outperformance in India

When assessing investment performance, I often urge you to evaluate us not just by the returns we generate, but by the risks we’ve avoided. In my decades of experience in the Indian markets, one principle has remained constant: risk is the shadow of returns. It’s often overlooked in times of prosperity, but when the markets turn, its presence becomes painfully clear—much like that friend who vanishes when the dinner bill arrives but reappears right on time for the next dinner plan!

1) The Real and Painful Price of Ignoring Risk

This lesson became all too real for me during the 2008 Global Financial Crisis when my portfolio plummeted by 50%. I had grown overly confident. It took three long years for me to recover—a humbling period that transformed my approach to investing. I realized then that risk isn’t some abstract concept—it’s real, and it results in permanent capital loss that can wipe out decades of wealth-building in a matter of moments. Many investors only discover too late that extraordinary gains often hide extraordinary risks.

2) Three Dimensions of Risk

At Cambridge Wealth, we categorise risk into three distinct dimensions:

• Unknown Unknowns (Global Risk): These are events that nobody sees coming. For example, during the 2008 Financial Crisis, the Sensex fell 60% even though India’s banking system remained relatively insulated from global market shocks.

  
  

• Known Unknowns (Economic Risk): These risks are often economic in nature but can still be difficult to predict. A case in point is the 2013 “taper tantrum,” when the rupee depreciated by 20% amid rising inflation and economic stagnation.

  
  

• Known Knowns (Asset-Specific Risk): These are risks that are specific to individual companies or assets. For example, in 2018, DHFL’s risky lending practices to its promoters’ family office posed a significant threat to its investors. Identifying such risks is where our careful analysis comes in.

  
  

3) Sound Management Leads to Returns

Risk management may appear overly cautious during periods of market euphoria, but it’s in these times that its value becomes apparent. Take the 2017-18 small- and mid-cap stock rally, for instance. Our conservatively positioned portfolio underperformed the broader market during that phase, which led to some questions from our clients. One client even jokingly asked if I was too busy watching cricket to notice the market rally. While I assured him I was multitasking, we stuck to our strategy—one that valued sustainability over speculation.

A similar pattern emerged during the 2020 COVID-19 market meltdown. While the market dropped nearly 40%, we focused on maintaining adequate cash reserves and invested in companies offering essential products. This strategic positioning allowed us to deploy capital effectively, and the subsequent market recovery rewarded our approach handsomely.

4) The Principle of Sound Sleep

A successful investment strategy isn’t just about maximizing returns; it’s about ensuring peace of mind—sleeping soundly at night, even in uncertain times. For example, during the 2018 IL&FS crisis, many investors chasing high-yield opportunities found themselves unable to access their funds when they needed them most. Meanwhile, our clients slept easy, knowing that our focus on liquidity and quality ensured their capital was secure.

Our responsibility is simple: protect your capital while only taking risks that are compensated. The power of compounding can only work when losses are minimized. After all, a 50% loss requires a 100% gain to break even.

In the long run, financial success comes not from maximizing returns during the best years but from minimizing losses during the worst ones. As the saying goes, "Bull markets make riches, but bear markets make wealth."