"Ganit Bhi Thodaa Chaahiye, Aur Aveg Par Sanyam Bahut
Santulan Agar Hum Dhoondh Le, Sampada Ban Jaayegi Akoot”
Translation: Evaluate you must…but only just…....emotion is a bigger beast…rather kept to least……for wealth to swell…. let greed & fear quell…
In simple terms it means that the game of financial investments is less about ‘intellect’ and more about ‘temperament’. Finding the perfect balance between the two is the secret recipe for a successful and sustained wealth creation.
The big question is whether finding this balance easy? Well, it is not easy but the good news is that it is certainly possible.
As Benjamin Graham, one of the greatest minds on value-investing, puts it, “Investing isn’t about beating others at their game. It’s about controlling yourself at your own game”
In this quintessential debate of intellect vs temperament, the key ingredient that makes all the difference is the ability of an investor to control emotions and avoid biases that come into play while taking investment decisions. These factors particularly get projected in the context of active investing in equity stock markets and related instruments.
Although the presence of such biases and behavioural anomalies in the context of investment decision making by individual investors are well documented, it is certainly not easy to ‘identify’ and ‘eliminate’ these in real life. It may sound ironical but more often than not it is easier to identify behavioural anomalies of another individual than to identify one’s own biases. Why it is so?
Metaphorically speaking, investment journey for most of us individuals is like navigating a spectacular maze which promises lots of goods to be explored in its different cells.
Different people would approach their quest with very different emotions- excited, overconfident, cautious or fearful- depending upon their past experience or what they learn from others. One may feel very excited to explore the next visible cell simply because the last cell was very rewarding, while the other, with a frustrating experience, may look at every possibility with fear. One wrong move may lead to another and spread further to worsening levels. In this example it is not difficult to infer that a simple rule-based approach, backed by best available information and intellect, will have best chance of success on a sustained basis.
However, humans are packed with all kinds of instincts and emotions and it is not easy to get rid of all these behavioural anomalies.
While intellect can be acquired or outsourced, temperament needs to be internalised and therefore harder to achieve and therefore of much higher importance. Simple rule-based approaches, developed and deployed by market experts over long periods of time, are often the best way to achieve objectivity.
This article is an attempt to provide some practical perspective to individual investors that can help them to identify and mitigate some of these anomalies.
Let us consider a few common practical scenarios… A trainer provides her services to a company and she is very familiar with its HR people with whom she enjoys excellent rapport. She feels very confident about investing in this company, mainly due to her personal association. Her happy experience with the company has created a perception that the company is doing very well and has a great future. --- This perception may or may not be true because she has not assessed the relevant information required for investing.
Kabir had invested some money last year into company X, which gave him a handsome return within 20 days. He has just received his bonus and is looking to invest his money for good short-term gains. Without much doubt in his mind, he invests in the same company’s stock hoping for an encore. --- His gamble may go horribly wrong because he has not assessed the current state of the company and last year’s return may have been due to some short term factors.
Vidya invested most of her surplus money in a blue-chip stock, which is one of the largest companies in India. In six months, the stock declined slightly, disappointing her against her great expectations. Now Vidya has sold the stocks and intends to put the money in bank deposit. --- Vidya may not have analysed the reasons for the temporary stock performance and also enough time was not given to the investment, resulting in possible opportunity loss.
In conclusion, investment should be approached with objectivity, unless the intent is to have fun and not to make money. In any case, there may be better ways of having fun than to put wealth at stake. It is advisable, therefore, to follow rule-based approach and seek help of expert whenever in doubt. Investment is a serious business as Warren Buffet puts it-Beware the investment activity that produces applause; the great moves are usually greeted by yawns.
(The writer is senior Vice-President, SBI Funds Management Ltd; Translation and synopsis is by Sh Subash Prasar, Managing partner, Mindstone Maven LLP)
