My Favourite Contra Bet in this Market 

Hello everyone, Rahul Shah here, trying to make investing accessible and profitable for the average investor.

I have an interesting case study for you today.

It raises a few interesting questions that I will try to address towards the end.

Let's go through the case study first. So, here goes.

I am not sure how many of you've heard of a gentleman called Julian Robertson.

He was a very famous investor in the US back in the 1990s.

In fact, his name was taken in the same breath as the Oracle of Omaha, Warren Buffett.

Julian Robertson was one of the titans of the hedge fund industry under whom an investor would have multiplied his money by 85x between 1980 and 2000.

In other words, an 85-bagger. That's a CAGR of close to 25%. Now, that's insane.

To earn 25% for that long, especially when the benchmark index has returned under 18%, is nothing short of extraordinary.

No wonder, he had become so famous back in the 1990s.

Then something shocking happened.

Julian Robertson decided to shut his fund down in the year 2000. Yes, that's correct.

You see, till mid -1990s, Julian's performance was so good that he had barely seen a down year. His wealth creation juggernaut was unstoppable.

However, the internet bubble proved to be his nemesis. He found himself confused in the tech boom.

No, he did not love internet stocks and bought them by the dozens.

On the contrary, he hated internet stocks as he believed them to be in a big bubble.

He correctly identified it as a mania.

He was quite early though. As the cliche goes, "the market can stay irrational longer than you can stay solvent"?

And this is precisely what happened with Julian Robertson. The bubble kept getting bigger and as he started underperforming, investors started exiting his fund.

Thus, his underperformance coupled with investor exodus, resulted into a significant drop in his fund size.

Robertson eventually threw in the towel in 2000. He told his investors that despite his best attempts, he has failed to understand the current market and hence, he is closing shop.

And so, the curtains came down on one of the best investment track records in history.

Now, here's something interesting.

Had Julian Robertson not closed his fund and had his investors continued to invest with him, they would have ended up outperforming both Warren Buffett as well as the benchmark index by a huge margin over the next few years.

Yes, that's true. Julian Robertson himself shouldn't have come under pressure and shouldn't have closed his fund.

Because here's what happened six years after he closed his fund. Julian Robertson's portfolio was up a whopping 120% versus the -7% returns earned by the benchmark index.

It even outperformed Warren Buffett's Berkshire Hathaway, which was up only 38%.

The takeaway is clear.

Robertson's portfolio was certainly way more volatile and did consist of stocks that went all the way down to zero. However, the big winners more than made up for the losers and net-net, the portfolio was a big outperformer.

Warren Buffett's portfolio on the other hand, was far less volatile. He lost less than Julian Robertson during the tech bubble and did not have shut down Berkshire Hathaway.

But he also underperformed Robertson in subsequent six years when Robertson earned 120% and Buffett was up 38%.

Of course, both Buffett and Robertson did outperform the benchmark index.

Well, recently I read about an interesting analogy to describe investors.

Most investors can be divided into two distinct categories i.e. optimisers and maximisers.

The goal of maximisers is to earn the best possible returns in the shortest possible time.

Optimisers on the other hand, also want to earn good returns but they also want to last for the long term. For optimisers, survival is as important as earning good returns.

It is clear from the comparison of Julian Robertson and Warren Buffett's portfolio that while Robertson tried to be a maximiser, Buffett was the perennial optimiser.

Robertson was more about earning the maximum possible returns in the shortest possible time while Buffett was all about ensuring survival first even if it came at the cost of giving up on few percentage points of extra returns.

Now, don't get me wrong. I am not saying that Julian Robertson was a bad investor. He was of course a great investor. However, his portfolio wasn't constructed to handle an extended bad period.

What made matters worse was that he was managing client money and not his own. So, the long underperformance made his investors nervous, and they started pulling money out of his fund. And this played a key role in him throwing in the towel and giving up.

Therefore, the big takeaway from this case study is if you are maximiser, your portfolio can face huge volatility and can even pose a big question mark to your survival.

So, are you equal to the challenge? Do you have the stomach to face huge volatility without panicking and throwing in the towel? Can you survive the worst days of the stock market?

Well, to be honest, I am an optimiser and not a maximiser. You see, I manage services where I recommend stocks from the dangerous world of microcaps and penny stocks.

These stocks do offer huge potential, but they often come with stomach churning volatility. However, since I am an optimiser, I also recommend subscribers to have at least 25% in fixed deposits or bonds at all times.

This fixed deposit component can even go to as high as 50%. As I said I am an optimiser and as much as I'd like to earn good long-term returns from microcaps and penny stocks, I'd also like to survive during the toughest times and reduce volatility.

The high fixed deposit component allows me to do this. It limits my losses and allows me to live to fight another day.

Likewise, you will have to make this choice for yourself. Do you want to be a maximiser and be like Julian Robertson where you do very well during good times but suffer a huge decline when things go against you?

Or do you want to be an optimiser and be like Warren Buffett who prioritises survival first even if it means giving up few percentage points of return?

If you want to be an optimiser like me then you better start taking some steps for reducing volatility and ensuring survival.

Always having some percentage of your portfolio in fixed deposits or bonds is one of the ways you can achieve this.

I know this could count as a contrarian bet in the current market where everyone is busy maximising returns.

However, as we saw in the case of Julian Robertson, bad times come unannounced, and you may end up paying a heavy price.

So, do consider this contrarian bet seriously if you haven't already.