of ETMutualFunds reached out to Sandeep Tandon to ask how he handled phases of market volatility, we had no idea that Quant’s now famous investment approach grew out of such tricky phases in the market. “In the beginning, we were all used to looking at data points in silos and I quickly realized that making decisions based on this approach is like shooting in the dark. The big lesson learned during these years has been the importance of combining multiple data points, as a particular thesis/specialization is only effective during certain phases.This learning has laid the foundation for a multidimensional research approach from which we reap the benefits until this day,” says Tandon.
When did you start your stock market journey? Do you remember your first years in the market?
My journey into the stock market began in early 1992 when Harshad-mania was at its height. My first behavioral finance lesson was learned during this phase, because you could feel the frenzy and euphoria of the market. I vividly remember selling off a large portion of the holdings in my family portfolio long before the fall. So while many people have bitter memories of this phase, I actually had a good run on my investments and it was a good time for my family. So, I have good memories of this phase.
What was the first thing you learned during your first years in the market?
The first thing we learned was that the stock market is all about mind games. One should learn to take a contrarian call on extreme levels of fear and greed. Although it is not easy to quantify these extremities, if one is able to develop this art, they can survive in this market.
What was the first bad phase in the market that you remember clearly? How did you navigate it?
The dotcom bubble of 2000 was the first bad phase for my personal wallet. I mostly owned tech stocks at the time and they lost 80-90% of their value. Even though I could feel the market euphoria, I was trying to improve my tax efficiency while waiting for my holdings to reach long-term status so I could maximize my after-tax returns. The big lesson learned here was simple: in the stock market, do not base your decisions on tax planning!
After this crash, the period until 2002 was difficult and depressing, as several market players had lost significant value. However, that’s when my penchant for studying macro data began. I quickly realized the importance of looking at macro factors instead of a basic bottom-up approach.
Can you tell us one mistake you remember clearly from your early years? What are your learnings from this mistake?
In the beginning, we were all used to looking at data points in silos and I soon realized that decision making based on this approach is like shooting in the dark. The big lesson learned over these years has been the importance of combining multiple data points, as a particular thesis/specialization is only effective during certain phases.
This learning laid the foundations for a multidimensional research approach from which we reap the benefits to this day.
You’ve been in the market for so long now. Were there any bad phases that made you lose your temper? How did you navigate it?
There have been several instances where we have made a big mistake by being biased and opinionated by either a few opinion makers or the perceived so-called breakthrough company/technology; due to the outsized noise surrounding these companies/technologies, I was swayed by the story or narrative and gained extraordinarily large exposure in these companies, thus completely ignoring the concepts of diversification and concentration.
The biggest lesson learned was that such a significant exposure should be backed up by detailed analysis and the focus should remain on analyzing the data rather than becoming an opinion maker himself or believing that he is the best analyst for these new companies/technologies.
Mistakes such as the one mentioned above have led to the construction of an investment framework based on data instead of one based on intuition or narrative.
How do you see today’s market in the context of your own journey?
Nowadays, it has become much easier to search and analyze global data in seconds or even less. Back then, even if we could get the data, which was a huge task in itself, the computational prowess to process that data just didn’t exist. All in all, it was a very long and unworkable process. Today, at a cost though, we can not only obtain global data, but also process it in meaningful ways to gain actionable insights. In fact, technology forms the backbone of our VLRT investment framework, where we give 1/3 weight each to valuation analysis, liquidity analysis and risk appetite and when these three components are biased, it helps to better synchronize investments. , thus allowing better risk management of the system.
If there is one thing you would want young investors to learn from your experience, what would it be?
Given the ease of access to data, my advice to investors is: try to design your own investment processes and continuously work on this process to improve and evolve it. This will not only allow them to sustain themselves in the markets from a long-term perspective, but the process will also ensure that they are not swayed during bouts of volatility.