I often tell people that I am nearly 100 years old. And, when they congratulate me on how well I look for my age, I add that, to put it more accurately—I’m closer to 100 than I am to 35. Most people react, “There goes Jamal again, being silly.”
But then, silliness is a necessary condition for joy, and being always joyful is my job, as it is yours. And this particular silliness has another important function—to get people to recognise that age, growing older, the passage of time, are actually wonderful. The longer you live, the more people you meet; the more people you meet, the more fun you can have; the more fun you have, the more joyous you are—simple.
And then, of course, there is so much more that you know. It is a cliché that there is no substitute for experience, and the reason that clichés become clichés is that they are true.
This particular 100-year-old man has a lot of experience of markets – in particular, the USD/INR market. He has seen it sit nervously steady for months; calmly steady for years—once, indeed, it was stuck at 31.37 for nearly three years; he has seen it devalued, losing more than half its value over two days; he has seen it split into two; and, of course, as now, he has seen it crash by 10% in a matter of days/weeks, spreading terror amongst media commentators and businesspeople.
And from this experience and, of course, more than a little help from a lot of people—to quote Blanche Dubois in A Streetcar named Desire (“Ah’ve always depended on the kandness of strangers”)—the old man has learned a few tricks.
* The market’s job is to make smart people look foolish—nobody really knows what is going to happen, yet smart people give prognostications, forecasts, views as if they do; in the usually short run, all of them end up looking foolish;
* Don’t depend on market views; in particular, do not be guided by the views of anyone selling you a financial product, just as you wouldn’t depend on the certificate of the seller when buying a house or a car or whatever; even assume 100% integrity, (a) like everyone else, your banker doesn’t really know, and (b) ultimately their primary responsibility is to the bank’s balance-sheet;
* Identify your risk strictly based on your business; while this seems obvious, this is sometimes a big trick.
Let’s go back to 2007-08, when the rupee was strengthening like there was no tomorrow; it rose above 40 to the dollar and everyone was convinced that it would hit 35. Normally, conservative companies (and, to be sure, some punters), aided and abetted by their bankers, stretched their risk tenors out to two, three and even five years and locked in “great” levels north of 40 to the dollar, with, of course, a little extra risk if the yen or the Swiss franc weakened as it never had before. Note none (or almost none) of these companies had anything to do with the yen or the Swissy, but, hey, the rupee was strengthening and they could protect their long-term export business and make something on the side for free—hah!
More recently, companies in partly commoditised businesses, where pricing was linked to USD/INR, or where there was a risk of USD/INR-linked pricing pressure, extended their horizons from three- four months to a year. Why? Well, the premiums had come down, business flow visibility was good and the rupee appeared wedged in the 63.50 to 65.50 range.
* Do not stay fully exposed—zero hedge means 100% risk; you can lose your pants and what they are intended to protect,
* A 100% hedge, assuming sound risk identification, is a better approach, but, of course, this leaves you open to—sometimes significant—opportunity losses, and, in companies with poorly-designed policies, board discomfort.
* A structured approach to hedging is best. Many companies use a ladder strategy, which means the near term is hedged (close to 100%) with reducing hedge percentages as you go out in tenor. The good thing about this is it does not use any market view; the bad is that since ladders (generally) do not have a stop loss, the worst case cost is never determined which means the risk is not fully managed.
We have developed a structured approach which has a tight stop loss (which determines the worst case value of the portfolio), uses no market view and, on average, delivers superior results. Of course, here, too, there are often—as currently—opportunity losses, but viewed over a longer horizon (say, 12 months), the programme delivers positive returns.
* The only magic wand in risk management is DISCIPLINE. It almost doesn’t matter what you do in the long run, provided you do it consistently. Of course, in the long run we are all dead, but, even over shorter horizons, any approach you use has to be implemented with discipline. A very smart man, recently in the news, once told me, “The true quality of a company’s risk management process is seen not in a crisis, but what it does when markets are calm.” As the 100 year-old man would say, “Indiscipline is necessary for joy, discipline is critical for business.”