Rupani Capital Management’s investment philosophy is focused on preserving and growing capital by managing risk. This primary objective guides all of our investment strategies and decisions with the goal of minimizing capital losses and increasing portfolio value.
We seek to not avoid “Risk” but use it as a tool to be managed for client’s benefit.
Risk management allows us to create low volatility portfolios that provide investors with the ability to:
1. Reduce losses by preventing deep draw downs during declining markets
2. Create wealth during bull markets
3. Provide investors the ability to “sleep well at night” knowing to expect low volatility when there is panic in the markets
Why avoiding big losses during declining markets is so critical to successful investing?
Below table shows a hypothetical example of how exceptional end result can be, if we are able to limit our losses during big bear markets.
Right side table assumes that we are avoiding 75% of downmarket but capturing only 75% of the upmarket in the Risk Managed Account as compared to the Buy & Hold Account.
| Buy & Hold Account | ||
|---|---|---|
| Year | Annual Return | Account Value |
| 1 | -40% | $60,000 |
| 2 | 35% | $81,000 |
| 3 | 9% | $88,290 |
| 4 | 21% | $106,831 |
| 5 | 15% | $122,856 |
| Absolute Return | 22.86% | |
| Risk Managed Account (Capture 75% and Avoid 75%) | ||
|---|---|---|
| Year | Annual Return | Account Value |
| 1 | -10% | $90,000 |
| 2 | 26% | $113,625 |
| 3 | 7% | $121,295 |
| 4 | 16% | $140,399 |
| 5 | 11% | $156,193 |
| Absolute Return | 56.19% | |
In fact, the impact of protecting capital during bear markets is so powerful that by just capturing ~40% of the upmarket, Risk Managed account is at par with the Buy & Hold account.
Below table shows how exceptional end result can be, if we are able to limit our losses during big bear markets.
Right side table assumes that we are avoiding avoiding 75% of downmarket but capturing only 75% of the upmarket in the Risk Managed Account as compared to the Buy & Hold Account in left table.
| Buy & Hold Account | ||
|---|---|---|
| Year | Nasdaq 100 Return | Account Value |
| 1993 | 10.6% | 110,580 |
| 1994 | 1.5% | 112,239 |
| 1995 | 42.5% | 159,985 |
| 1996 | 42.5% | 228,043 |
| 1997 | 20.6% | 275,088 |
| 1998 | 85.3% | 509,738 |
| 1999 | 102.0% | 1,029,416 |
| 2000 | -36.8% | 650,179 |
| 2001 | -32.7% | 437,895 |
| 2002 | -37.6% | 273,334 |
| 2003 | 49.1% | 407,596 |
| 2004 | 10.4% | 450,149 |
| 2005 | 1.5% | 456,856 |
| 2006 | 6.8% | 487,877 |
| 2007 | 18.7% | 578,964 |
| 2008 | -41.9% | 336,436 |
| 2009 | 53.5% | 516,563 |
| 2010 | 19.2% | 615,847 |
| 2011 | 2.7% | 632,475 |
| 2012 | 16.8% | 738,857 |
| 2013 | 35.0% | 997,383 |
| 2014 | 17.9% | 1,176,314 |
| 2015 | 8.4% | 1,275,477 |
| 2016 | 5.9% | 1,350,603 |
| 2017 | 31.5% | 1,776,313 |
| 2018 | -1.0% | 1,757,839 |
| 2019 | 38.0% | 2,425,115 |
| 2020 | 47.6% | 3,578,984 |
| 2021 | 26.6% | 4,532,068 |
| 2022 | -33.0% | 3,037,845 |
| Absolute Return | 3037.85% | |
| Risk Managed Account (Capture 75% and Avoid 75%) | ||
|---|---|---|
| Year | Annual Return | Account Value |
| 1993 | 7.94% | 107,935 |
| 1994 | 1.13% | 109,149 |
| 1995 | 31.91% | 143,973 |
| 1996 | 31.91% | 189,908 |
| 1997 | 15.47% | 219,292 |
| 1998 | 63.98% | 359,583 |
| 1999 | 76.46% | 634,530 |
| 2000 | -9.21% | 576,090 |
| 2001 | -8.16% | 529,066 |
| 2002 | -9.40% | 479,360 |
| 2003 | 36.84% | 655,957 |
| 2004 | 7.83% | 707,318 |
| 2005 | 1.12% | 715,223 |
| 2006 | 5.09% | 751,645 |
| 2007 | 14.00% | 856,894 |
| 2008 | -10.47% | 767,156 |
| 2009 | 40.16% | 1,075,208 |
| 2010 | 14.42% | 1,230,199 |
| 2011 | 2.03% | 1,255,110 |
| 2012 | 12.62% | 1,413,443 |
| 2013 | 26.24% | 1,784,365 |
| 2014 | 13.46% | 2,024,452 |
| 2015 | 6.32% | 2,152,448 |
| 2016 | 4.42% | 2,247,532 |
| 2017 | 23.64% | 2,778,848 |
| 2018 | -0.26% | 2,771,623 |
| 2019 | 28.47% | 3,560,705 |
| 2020 | 35.69% | 4,831,342 |
| 2021 | 19.97% | 5,796,282 |
| 2022 | -8.24% | 5,318,523 |
| Absolute Return | 5318.52% | |
Bottom-line:
1. Just capturing ~67% of the upmarket, Risk Managed account is at par with the Buy & Hold account.
2. Returns are enhanced by Risk Managed Account over long-term while greatly reducing big account drawdown
3. Small cost of annual portfolio hits are OK in the long-term, as long as account doesn’t take a big hit.
There are tens of styles and millions of ways to make money in the stock market. Each have their own pros and cons. We need to decide whether we need to sleep well or eat well.
All best-performing strategies underperform in some years. A strategy that works consistently every year just doesn’t exist. Most investors hang up on a strategy after disappointment of few down years. Very few stick through drawdown period as emotions play its role in wrong decision making.
Patience and discipline are always needed in the stock market regardless of any winning strategy that we pick. Successful investing runs contrary to human nature and requires being dispassionate to beat the market over time.
Biggest risk in sticking to a strategy is a DRAWDOWN.
Great performance in a strategy alone is not enough. Performance should be matched with consistency so that we can stick to strategy through all the market’s gyrations. The only investment strategy we should consider is one we will actually follow.
Holy grail of successful investing is to simply understand the math of investing. Keep losses smaller than gains and size up the positions when market is in our favor.