The most important lesson investors can learn from trekkers

May 27, 3am: Dhunda (Himachal Pradesh).Altitude: 13,100ft.Viha turned 15 just a few hours ago. She has hardly slept for three hours and is now standing in line with the other 23 trekkers to complete the final, and probably the most difficult, part of the trek to Buran Ghati in the Himalayas. The temperature is closer to 0°C. She is at the start of the line and taking instructions from trek leader Shravan S.Shravan’s primary job is to take these 24 trekkers safely to Buran Pass, located at an altitude of 15,000ft, and descend for the next 14 hours. Most of these trekkers are inexperienced, but to their credit, they are fit.Shravan and his three guides are keeping a sharp eye on them so that they don’t deviate. They need to reach the pass by 6am. That’s the turnaround time. If they miss it, they will have to turn back. We will come to this story in a bit.Stock market crashOn June 4 (general election results day), the stock market fell as the Bharatiya Janata Party (BJP) was unable to win an absolute majority. A trader lost ₹14 lakh in a single trade. He was trading futures. And he was not the only one. It was a day when the India VIX moved from 35 to 45.Just the previous day, on June 3, nine trekkers out of a 22-member team died on an expedition to Sahastra Tal, situated at an altitude of 15,000ft. They were hit by a blizzard (or unexpected change in weather) where visibility became zero. The trekkers belonged to the Karnataka Mountaineering Association and had three local guides.In both cases, the traders and trekkers faced what one would call extreme volatility — one in terms of prices and another in terms of the weather. This is often called the perfect storm. In the case of markets, perfect storms happen when overvalued markets experience extreme events that are not modelled by analysts. For mountaineers, these events come in the form of blizzards that leave them knocked out in extreme cold and may sometimes result in casualties.But over the years, it is the mountaineers who have managed to tackle volatility better than stock market traders and investors.Managing volatilityThe science of trekking and mountain climbing is getting more resilient with more amateur climbers actually making it to the top of Mount Everest.In the book Everest Inc: The Renegades and Rogues Who Built an Industry at the Top of the World, Will Cockrell gives some interesting statistics.“In 1953, when Edmund Hillary and Tenzing Norgay Sherpa became the first people to summit Mount Everest, and in 1992, when the first paying clients were successfully guided up it, only 394 climbers reached the top. Between 1992 and 2024, more than 11,500 others accomplished the same feat. The vast majority of them — more than 90% — were clients and employees of a small number of mountain-guiding companies,” writes Cockrell.There are many companies that have become experts in taking amateurs to the top of Mount Everest as long as they are following instructions and are relatively fit to climb.Now, let’s look at the markets.Over the past three years, the options contracts traded on the NSE have gone up 12x to 96bn in 2024. But 91% of the options traders made losses in FY24.During the year, 1.13 crore unique individual traders incurred a combined net loss of ₹1.81 lakh crore in futures and options (F&O). The top 3.5% of loss makers, or approximately 4 lakh traders, faced an average loss of ₹28 lakh per person.But investors are falsely made to believe that they can make easy money. There is nobody to guide retail options traders about the mistakes they make, and most of these traders now come from tier-2 towns where they have no access to expert advice besides YouTube channels or Telegram groups.Now, the Securities and Exchange Board of India (Sebi) wants to have tighter regulations to protect retail investors and also improve market stability.One way to address the issue is to simply increase the lot sizes so that small retail investors won’t have the capital to trade derivatives. While this is a prudent step, there are many who feel that capping capital to restrict investors is not fair.But it is not just derivatives traders who lose money. In general, traders or even day traders do not have a good track record of making money because they try to read short-term trends and most of the time, they get it wrong. Their understanding of volatility is low, and unlike long-term investing, there is hardly any guidance. medium113690504Arjun Majumdar is the CEO of Indiahikes, one of the oldest and largest hiking companies in India. Trekking is taken more as a process than adventure and the big focus is on risk management.Indiahikes has built strong standard operating procedures that could put a software company or even an investment bank on the backfoot when it comes to risk-management processes.Hiking expeditions are all about understanding the weather. With the help of local guides, trek leaders spend their time only to figure out the nature of winds and how they will impact their expedition.“It requires three things to make a successful trek or a mountaineering expedition successful. Process, people and the equipment, or, in other words, technology,” says Majumdar. He also prefers to hire team leaders who have technical knowledge and are good at communicating with hikers.Many a time, his team leaders are from urban areas while the rest of the crew is local. The local crew understands the terrain but is not in a position to take big calls. To take calls on weather patterns, the team leaders have gone through rigorous training for many months. They are experienced and have the ability to turn back or take a defeat against the mountains.Locals can be coerced by the trekking or mountaineering clients to go further into bad weather even when things are looking bad.“But the real deal is the turnaround time. No matter what happens, trek leaders have to abide by the turnaround time or there will be serious consequences,” says Majumdar.All about turnaround timeSimply put, turnaround time is the time that is pre-decided by the trek leaders while planning the expedition. So, if the turnaround time is 6am to reach the top of a summit, then at that time everyone has to start descending or turn around and go back to the base, irrespective of where they are. Even if they are 10m away from the peak, they must turn around. In fact, most Himalayan expeditions fail because someone out there doesn’t respect this.In one of the greatest mountain tragedies that happened in 1996, eight climbers got killed and many were stranded by a storm that hit the team while climbing Mount Everest. In the book, Into Thin Air, Rob Krakauer described this expedition in great detail. He joined Rob Hall’s adventure consultant to climb Everest along with 15 others.He said, “At the base camp before our summit bid, Hall contemplated two possible turnaround times — either 1pm or 2pm. He never made it clear which of these times we were to abide by. This was curious, considering how much he’d talked about the importance of designating a hard deadline and sticking to it no matter what.”Krakauer clearly blamed Hall. He blamed the accident on the failure to fix the ropes ahead of time, which created a bottleneck, and the lack of firm, preset turnaround times.He further made it clear how the trek leader was obsessed with the turnaround time and planned to fix the real deadline on the summit day. But later, he also said there were practical problems in maintaining the same.Clients have paid huge amounts of money to summit the Everest, and telling them to stop when they are close to the destination is difficult. He further wrote, “If Fischer (another trek leader) and Hall had been true to their pre-arranged rules, everyone else would have turned back before the top.” medium nocaptionhttp://youtu.be/fRHO4Nuyk-M?si=DnlgPM-MsOgWY84QExpert traders implement the concept of turnaround time in a different way. Turnaround time simply means to avoid risky or volatile stocks. For options traders, it means you buy low volatility and sell high volatility, but more often traders end up doing the opposite.Turnaround time should not be confused with value investing, which also advocates to buy stocks that are trading at a discount to their intrinsic value. Value investing is all about buying stocks that are currently undervalued. This has a lot of risk tied to it and in general, investors make money for the known risk they take. Turnaround time is about unknown risk. When you see an unknown risk, you simply avoid that.Retail investors typically like to buy stocks that fall but many times falling stocks never actually rise to their original values. In November 2019, the Yes Bank stock was available for ₹65. Many investors started to buy the stock at ₹50 with the idea that it will regain its past glory. As the stock fell, they kept buying. Today, it is at ₹23 and all those investors who had averaged the stocks are sitting on losses.From 2021 to 2023, the stock was range-bound between ₹15 and ₹17. Investors who bought in this range are in profit. But most of the buying happened at ₹50, which was way back in 2019.“Currently I’m happy to underperform,” says Rajiv Thakker, chief investment officer and director at PPFAS Mutual Fund, in an interview with Value Research. He knows that he is standing closer to the top of a mountain where now the winds are strong, or the valuations are extreme.A few feet ahead, there is turbulence. A better bet is simply not going into that space that historically has proved to be volatile and dangerous. He simply has avoided.When Rob Hall and Scott Fischer decided to start Adventure Consultants, an adventure firm to take amateur climbers to the top of Mount Everest, Hillary became their biggest critic. His view was that turning mountain climbing into a commercial venture was not a good idea and it could lead to disasters.Hall felt that with proper precaution and training, it was possible to take amateur climbers on top of any Himalayan peak, and why should people who have the desire and the money to scale mountains be stopped from this activity?What is really happening?Unlike mountaineering, where expert mountaineers have taken it upon themselves to take rich amateur climbers to the top and worked hard to make the journey safe and even predictable, in the case of markets, there are firms that are exactly doing the opposite. They have sophisticated algorithms that help them make money on a regular basis, but this is done at the cost of the retail trader. The retail trader doesn’t have sophisticated algorithms. Most of the retail traders trade on their own. They are basically duds on the other side of an institutional trade.In the case of mountaineering, we have seen that the smartest mountaineers eventually have built companies to help amateurs achieve their goals. But in the world of finance, the smartest guys take advantage of the asymmetry of knowledge among the retail traders to make money.While mutual funds have turned out to be a good model where smart fund managers have helped retail investors make money, this model is also going through a sea change. Low-cost index funds are now becoming difficult to beat, yet most advisers are still selling active products.But in general, the problem of long-term investors is solved where an industry is now able to understand it can benefit by actually delivering risk-adjusted returns to retail investors.It is the retail traders who are at a loss. These are the people who doesn’t like advice or likes to do things on their own or even if they go in for advice, they end up with fly-by-night operators who charge big fees and yet give no solutions. medium nocaptionhttp://youtu.be/Oy8O_4JHa68?si=1fhmFT7rbHSTneUeWhat mountaineering teaches us is that mountain experts and amateur risk takers can work together and achieve their goals. If they can do it, so can expert traders.When Indiahikes takes its clients into the mountains, they take the vitals of the hikers three times a day. They check their blood pressure, blood oxygen levels and also see that the hikers are well rested. If any hiker shows signs that he is losing strength, he is sent back to the camp.Traders should learn a simple thing. If they want to trade, they should firstly have the capital. Secondly, they should have the basic knowledge of probability and volatility and a lot of patience. But most importantly, they need a guide.Richard Bass was the oldest person to reach Mount Everest at the age of 55. He was able to do it because he had excellent guides. He also had an inherent advantage. The higher he climbed, the stronger he felt. It was a rare condition that helped him climb many mountains. Bass was a rich man, and he could get the best guides. He never ever did a summit on his own and to his credit he has done the top seven summits in the world.And coming back…May 27, 6am: Buran Ghati PassAll 24 trekkers have reached the pass safely. Everyone is overwhelmed, while Viha broke down. She was not the only one. It is an experience everyone will remember forever. On the other hand, trek leader Shravan is keeping an eye on the weather. It could change anytime. Before the trekkers could wipe away their tears, he asks them to move fast.The trekkers, reflecting on his words, make the move. After all, they have to abide by the turnaround time. Or more importantly, reach the base camp on time.