Matters of the gut

Alma Mater is a young million dollar online brand for customized merchandise and alumni memorabilia for schools, colleges and companies.

In a recent INK talk, Varun Agarwal, the founder of Alma Mater, shared his mantra for entrepreneurial success – “Don’t think too much”.

EQ for business

Much to the chagrin of consultants and other MBA types, many successful businessmen seem to rely more on instinct or intuition than intellect.

There are more business ventures born out of “gut feel” rather an elaborate market assessment exercise.

In fact, the connecting thread across all entrepreneurs are characteristics such as the stomach to take risks, act against conventional wisdom if required, persevere for what one believes in, forego immediate pleasures and even undergo near term pain for the sake of longer term gratification.

All these characteristics in my opinion are matters of gut (EQ) and not of IQ.

On the flip side, many talented individuals, who may be experts in their respective fields, fail to start an enterprise of their own, either because they lack the gut for it or because of analysis paralysis.

EQ for investing

In my opinion, this phenomenon may well be true not just for entrepreneurship but also for investing. Warren Buffett is known for saying that investing is one field in which a high IQ could actually prove to be a disadvantage. How else does one explain the failure of sophisticated hedge funds such as LTCM?

During the last couple of years, the Sensex hit historical lows (in valuation terms) a few times and most investors, fearing further decline, failed to add on to their holdings or, even worse, sold a portion of their portfolio. There was gloom all around and India going down the drain was the favourite gossip in business as well as investor circles.

It was easy to cite examples such as the currency situation, corruption, current account deficit, policy log-jam, and comparing equity return over fixed income return during the past five years to justify the overall pessimism surrounding equity investing.

The bottom-line is that fear of losing money over the short term disables people from making money in the long term.

Although math can show how cheap equities are (compared to historical averages) or how equities have outperformed fixed income investment over many decades, people are unable to make use of the situation when the market is undervalued because they lack the gut to invest. As a result, their mind searches for various reasons to stay away from the market instead of one reason why it may be the most opportune and least risky time to invest from long term perspective.

Normalcy will return

What most people fail to understand is how rapidly things can change and how soon the markets can incorporate (precede) the change in sentiments. Those who don’t buy during gloom are forced to pay the price for a cheery consensus.

Those who possess the gut to invest when the chips are down believe in a few Yoda-like tenets:

The world or a country is not going to come to an end because of an economic downturn. Eventually normalcy returns. The longer the bad phase, the shorter the distance to recovery.

(The author is a business consultant. Feedback can be sent to >perspective@thehindu.co.in)