Value Has A Long History Of Never-Ending Drawdowns And Tiny Intervals Of Outperformance

During his recent interview with Tobias, Mikhail Samonov, Founder and CEO of Two Centuries Investments discussed why Value Has A Long History Of Never-Ending Drawdowns And Tiny Intervals Of Outperformance. Here’s an excerpt from the interview:

Tobias: Yeah, it’s absolutely fascinating. I just wanted to get your comment on that. Finally, you have this great line about value. You said value has a long history of never-ending drawdowns and tiny intervals of outperformance. Is that value?

Mikhail: That’s value. It’s like a melancholy normal. You go to the ocean and start fishing for this big whale. When is my glory day? The drawdown is over and it feels so good. I think the idea is to disconnect this emotional brain that feels so good when things are working and just to set things sailing, and there will be some really, really awesome periods for value ahead of us that will I’m sure get us out of drawdown and generate positive return. I’m really sure about that. The question is when and how much patience you need until then.

And yes, value especially, but everything like stock market, I obsess with drawdowns because, again, as an asset owner, that’s what you feel. You see your highest point recently and you’re like, “Ooh, I have this.” You don’t look at calendar, I mean you do, but secondary calendar. There’s a lot of ways to show performance that feels appealing to a client if you’re an asset manager, [unintelligible [00:49:06], if you’re an asset owner and you log in and you see the highest value that you lock it in, that’s drawdown. And pretty much will spend the vast majority, a lot of time in drawdown mode.

That’s the time where we stick with the process and continue to innovate, and then when the winds align and we reach the new heights. But surprisingly, that’s when you’re living month by month, year by year, that’s how it feels. But as soon as you zoom out, all that disappears and you just start to see– if you pick the right general horses and you’re not giving up, the risk is not ruining your switching, then the compounding kicks in.

The clients who have been with us for a longer time now, things scare them a lot less. A, they know our strategies are working as expected. But, B, because their starting point now has compounded into something material, the drawdowns even of the same magnitude, now feel less scary on the cumulative line.

So, a lot of it I think is about your brain and how you set up the scorecards. We have this awesome way to customize scorecards that have multiple ways for you to win. You can tell us, “No, this doesn’t apply.” But it’s about holistically measuring success, not in any sort of narrow way. But it’s getting from A to point B, which is decades from now with all this uncertainty. There’s going to be a lot of drawdowns and they check a rainy day, I’m going to get too depressed and give up on where you’re going just because it’s raining.

Sometimes, you might change your schedule, but if there’s a big storm, like this March, it was definitely a lot of self-awareness time. Even everything’s working, but you still feel the primal brain, [crosstalk] brain kick in. You call your friends, you call the pros, you call the experts, you shake things out, and then you keep going, even when everything’s risk-managed and we’ve seen this before, etc. But yeah, drawdowns are the pain of our existence and we have to deal with that pain in any way we can to keep going.

Tobias: Yeah, I think that seeing them happen historically is certainly a way to prepare yourself mentally, at least for the ones that you’re currently enduring or ones that will come into the future. It’s absolutely fascinating. Mikhail, if folks want to get in contact with you or follow along with what you’re doing, how do they go about doing that?

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