Sully and the Black Swan – Reading between the lines

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By now, almost every blog related to investing will have a post on “navigating uncertainty”, “investing in a crisis” and many other lessons. IThought I will make my contribution too by writing about what can investors can learn from Sully, a 2016 English movie.

On Jan. 15, 2009, Capt. Chesley “Sully” Sullenberger tries to make an emergency landing in New York’s Hudson River after US Airways Flight 1549 lost its engines due to bird strikes. Miraculously, all of the 155 passengers and crew survive the accident, and Sullenberger becomes a national hero in the eyes of the public and the media. Despite the accolades, the famed pilot now faces an investigation that threatens to destroy his career and reputation.

Rotten Tomatoes – Plot

You might think that it was just another extraordinary movie where Tom Hanks played the Captain and what has it go to do with investing?

In layman terms, Tail Risk is the possibility that an unlikely event will occur and cause a very large loss. Low-probability, high-impact events.

Here is a good article from Morgan Housel where he explains the three distinct sides of risk. Morgan says tail risks are the hardest to learn, and can often only be learned through experience. And that’s the reason I wanted to learn from Captain Sully’s experience. The miracle on the Hudson was a tail-risk event. Not every day do you see a plane crashing.

There are 3 accidents for every Million flight departures. If you only look at CFIT or LOC-I accidents, the number will be much lower. Meaning, there is a very small probability of 0.0003% for an accident to occur every time you board a flight. In the world of Investing, the market crash in March – 2020 was because of the once-in-a-century tail risk event – Covid 19!

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Why do tail risks matter?

I’ve delivered a million passengers over 40 years in the air, but in the end I’m gonna be judged on 208 seconds

CAPTAIN SULLY

So what do we do to mitigate the impact of such rare events? Note that I use the word mitigate and not eliminate. As investors, we will always have the tail risk. If you are not up for it, you are better off with Government Securities or Fixed Deposits.


“Never forget, no matter what’s happening, to fly the plane.”

One of the 3 advices given to young Sully. To focus on the basics. To keep things simple.

As soon as the birds hit the plane and damaged the engines, there was no thrust and the plane started losing altitude. To panic would be the worst thing to do. Sully kept his calm and composure. Despite the air traffic controller asking him to try returning to one of the nearby airports, Sully focused on the critical things that mattered – height, speed and impact. He immediately calculated that they did not have enough speed or height to take a turn and proceed to the airport for a normal landing. Since the plane was losing altitude, they could crash into one of the most populated areas of the world. It could be fatal for both passengers and the people in the city IF they couldn’t make it to the airport. Imagine. You are in control of the fate of 155 people. In one of the interviews, Captain Sully had this to say about the emotions he experienced.

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The surprise was how intense it was. In commercial aviation, we work hard never to be surprised by anything. We plan ahead, anticipate every course of action and have alternative courses of action. But the effect was huge in those first seconds when the birds struck us and damaged the engines. And the thrust loss was sudden. My body’s normal physiological response to this sudden life-threatening stress was intense. My blood pressure shot up. My pulse spiked. We all got tunnel vision as our perceptual fields narrowed because of the stress. But, as professionals, we had learned to master the craft and to master ourselves. We had the mental discipline to compartmentalize our minds and focus clearly on the tasks at hand.

Captain sully

Note the last point – “We had the mental discipline to compartmentalize our minds and focus clearly on the tasks at hand.” At one point during the accident, Sully said “It’s my plane” meaning he was in control of the situation. The first thoughts for anyone would be to take the easier way out – to try and return to airport for a safe landing. Sully knew that he had only few minutes to decide but he consciously took few precious seconds to carefully review all his options and then take an informed decision. He knew that if he could crash-land the plane in the Hudson in one full piece, they will be rescued. As the fortune cookie message that Sully finds in his wallet later says – A delay is better than a disaster. Sully also chose to spend time on highest priority items and had the discipline to ignore everything that he did not have time to do (like cutting off the air traffic controller).

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In investing too, success has more to do with being a good investor than picking good investments. When markets crashed this year, the first thoughts for anyone would be to take the easier way out – sell everything. The basic requirements for an investor went for a toss. We fell prey to our emotions. We didn’t know what hit us. We were selling right at the bottom when we were supposed to be buying. We were looking at prices when we were supposed to be looking at businesses. Sully would have kept his calm and focused on the basics by ignoring the noise. Be a Sully. I know it is easy to say in hindsight but Covid and Sully have taught us what to do in such tail risk events –

Focus. Control. Review. Prioritise.

  • Focus on the event. Streamline your thoughts to push out noise.

  • Take control. Do not decide based on others’ conviction. Do not take a decision in fear or haste.

  • Review. If the crisis would have any material impact on the underlying businesses of existing portfolio. Crisis could have an impact only on the price and not the business.

  • Prioritise. First, exit the stocks which might have some permanent impact. Then. look at stocks which might have tailwinds because of the crisis. Or else, buy into good companies which are available at great prices.

No blog is complete without a quote from Warren Buffett. When WB was in India, he was asked – “What makes Warren Buffett a great investor? Is it the intelligence or the discipline?”

The good news I can tell you is that to be a great investor you don’t have to have a terrific IQ. If you’ve got 160 IQ, sell 30 points to somebody else because you won’t need it in investing. What you do need is the right temperament. You need to be able to detach yourself from the views of others or the opinions of others. You need to be able to look at the facts about a business, about an industry, and evaluate a business unaffected by what other people think. That is very difficult for most people. Most people have, sometimes, a herd mentality which can, under certain circumstances, develop into delusional behaviour. You saw that in the Internet craze and so on. The ones that have the edge are the ones who really have the temperament to look at a business, look at an industry and not care what the person next to them thinks about it, not care what they read about it in the newspaper, not care what they hear about it on the television, not listen to people who say, “This is going to happen,” or, “That’s going to happen.” You have to come to your own conclusions, and you have to do it based on facts that are available. If you don’t have enough facts to reach a conclusion, you forget it. You go on to the next one. I’ve been asked a lot of times whether that was something that you’re born with or something you learn. I’m not sure I know the answer. Temperament’s important.

WARREN BUFFETT INTERVIEW FROM INDIA

Like I said before, investing will always have the tail risk. One has to understand and accept the risks involved. Unlike aeroplane accidents, such events in the market are an opportunity because market tends to repeat or at least rhyme.

There is nothing new in the Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the market today has happened before and will happen again.

Reminiscences of a Stock Operator

For Example, it is normal for NIFTY to fall 14% at any point in time. You shouldn’t be investing if you can’t accept such risk. NIFTY falling 28.5% (3-sigma) in 20 trading days is a tail risk or a black swan event. In March this year, NIFTY fell 38.5% from the peak and is back to those highs in November. The time taken to recover might sometimes be longer but the market always goes up.

Based on NIFTY 50 closing prices from Nov – 2007 to Nov – 2020
NIFTY 50

So,

Never forget, no matter what’s happening, to be an investor.


“A pilot never stops acquiring knowledge.”

The very first advice given to young Sully. And Sully did just that. All his life. He was also told – “You’ll make mistakes. Everyone does. Just learn from them.”

Pilots undergo training to prepare them for crisis situations. It allows them to remain calm under pressure and handle situations in the best possible manner. Sully didn’t become a hero in 208 seconds. It was the years of learning and experience that helped him. He built his decision making prowess over 42 years. Sully has read countless CVR transcripts of deceased pilots. He has significant accident investigation experience. Sully said that he has flown in to New York so many times that he immediately knew he had only 2 airports nearby where he can land. Sully also knew the city and he was familiar with the parameters like distance and altitude because of his past experience. And in his own words – ” I am also well read”. In short, Sully was always prepared for such tail risk events.

Plan. Pilots have checklists. So should Investors. For starters, keep a written plan with details of exactly how you’ll act during such events. That way, you can simply execute a well-thought-out data backed strategy made beforehand.

It could be as simple as – I will start buying when NIFTY falls more than 25% and will keep adding for every incremental 5% fall. That’s far better than the alternative of making things up during a stressful situation. One should have a portfolio level plan and an individual plan for each stock because some events might have an impact only on certain stocks. Also have plans for stocks in your watchlist so that you can pounce on such opportunities. Having said that, no mathematical model or plan would have accounted for negative oil prices. So use plans and checklists as tools to take informed decisions and calibrate along the way as and when you are presented with facts. 

Some opportunities during the March crash:

  • Hero MotoCorp , the leader in 2 wheelers, was trading at 10% earnings yield (FY20 PAT = 3600 Cr, Market Cap in March = 35000 Cr)
  • JSL twins – 50% of India’s stainless steel sector was trading at 2000 Cr
  • Varroc – bankruptcy valuation

Read. In addition to being a reader, Sully had experience on his side. Unfortunately, not all of us have that luxury but we could learn from others’ mistakes and success by reading.

Like, read about how markets behaved in 2000 dot-com bubble or how intelligent investors made use of the 2008 global financial crisis. Just sit and think about how this event could be same or different from the past events. Read about companies in various sectors to identify at what stage of the market cycle are they in.

Some stocks which had early signs of tailwinds/reversal even before Covid:

  • Dhanuka – Above average monsoon, higher reservoir and ground water levels, structural changes in raw material pricing. Q3 FY20.
  • Laurus Labs – Business level breakout in Sales & Operating Margins. Management said – “We can tell you very clearly. We are out of the woods.” Q2 FY20.

So,

An investor never stops acquiring knowledge.


When life throws a black swan at you, be a Sully. Happy Investing!



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Sanjay Elangovan
Figuring out what works in the markets.
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