Dear Patrons,

Outcome Bias

A story to start with,

Say one million monkeys speculate on the stock market. They buy and sell stocks like crazy. What happens? After one week, about half of the monkeys will make a profit and the other half a loss. The ones that made a profit can stay; the ones that made a loss goes home. In the second week, one half of the monkeys will still be riding high, while the other half will have made a loss and are sent home. And so on. After ten weeks, about 1,000 monkeys will be left — those who have always invested their money well. After twenty weeks, just one monkey will remain — this one always, without fail, chose the right stocks and is now a billionaire. Let’s call him the success monkey.

How does the media react?

They will get hold on this animal to understand its *success principles* and even if there is none, they will find reasons to support it: perhaps the monkey eats more bananas than the others. Perhaps he sits in special corner of the cage. He must have some recipe for success, right? How else could he perform so brilliantly perfectly for twenty weeks? – Impossible!

The monkey story illustrates the outcome bias. We tend to evaluate decisions based on the result rather than on the decision process.

Never judge a decision purely by its result, especially when randomness or ‘external factors’ play a role. In current uncertain scenario where result is completely non predicable. Every day is unfolding with new set of challenges. We have only one line to say to investors in this scenario,

Market wants you to act, but don’t react.

Dear Patrons.

Uncertainty is certain.

No investor can predict the future. If you think you are an exception, would you have been able to predict any of these events that impacted the stock market over the past two decades?

• 9/11 terrorist attacks in USA (2001)
• War in Iraq (2003)
• Global Financial Crisis (2008)
• European debt debacle (2010)
• Greece on the brink of expulsion from the euro (2015)
• China’s stock market crash (2015)
• BREXIT Event (2016)
• Demonetization (2016)
• Global pandemic induced lockdown (2020),

Financial markets are out of our control. Earthquakes are out of our control. Pandemics are out of our control. Floods are out of our control. Droughts are out of our control. Technological change is out of our control. Mostly everything is ultimately out of our control.

Than what we can control?

BEHAVIOR

In Investments, We have to control our own emotions and sentiments. We have to control our greed and fear.

Combat UNCERTAINTY by developing CONSISTENCY.

Dear Patrons,

On a busy city cross roads, a man waves his red cap during rush hours. That creates lot of disturbance to vehicle drivers. A policeman comes up to him and asks: ‘What are you doing?’ The man replies, ‘I’m keeping the giraffes away.’ ‘But there aren’t any giraffes here.’ Said the policeman.  ‘Well, I must be doing a good job, then.’ The man replies with authority.

This is ‘Illusion of Control’

On many busy cross roads in Europe, you can stop the traffic and cross the road at the press of a button. Actually, the button’s real purpose is to make us believe we have an influence on the traffic lights, and thus we’re better able to endure the wait for the signal to change with more patience. Such ploys are called ‘placebo buttons’.

Nobody understands why international events or some random statements of politicians can have such an effect on the market, but everybody reacts on it as they can control it. They are merely sounds waves. It is a real wake-up call if we realize the truth- that the world economy is a fundamentally uncontrollable system.

An investor putting extreme efforts in managing his investment is no better than the man with the red hat. He is trying to control something which is not even taking place. Therefore, focus on the few things of importance that you can really influence. For everything else: Destiny has its on way.

Nishit Siddharth Shah

Dear Patrons,

Social Life vs Reality

Social Life:

I am honoured and thrilled to announce that I have been selected among the hundreds of applicants who participated in professional and the most-respected exam which evaluates the skills and ability to operate fuel-based vehicles. I cannot wait to see what the next chapter holds.

Reality:

I got my driving license

Here is one more example,

Social Life:

I am extremely pleased to initiate progressive achievement towards building a smart career for my daughter. With this process, she is free to select the education of her choice from the plethora of courses available in universities worldwide.

Reality:

I have started SIP for Daughter’s education.

Social life presentations may be fancy, confusing and over informative. However, the reality should be easy to understand. Same goes with investments, one may choose to spread and stretch it and eventually to get confused in managing it or one may choose to remain simple & long term investor to firmly believe in compounding over time.

Dear Patrons,

Chauffeur knowledge

In 1918, Max Planck went on tour across Germany. Wherever he was invited, he delivered the same lecture on new quantum mechanics. Over time, his chauffeur grew to know it by heart. Once his chauffeur said, ‘It has to be boring giving the same speech each time, Professor Planck. How about I do it for you in Munich? You can sit in the front row and wear my chauffeur’s cap. That’d give us both a bit of variety.’ Planck liked the idea, so that evening the driver held a long lecture on quantum mechanics in front of a distinguished audience. Later, a physics professor stood up with a question. The driver said: ‘Never would I have thought that someone from such an advanced city as Munich would ask such a simple question! My chauffeur will answer it.’

There are two types of knowledge.

First, we have real knowledge. We see it in people who have committed a large amount of time and effort to understanding a topic. The second type is chauffeur knowledge. It is the knowledge from people who have learned to put on a show.

It is increasingly getting difficult to separate true knowledge from chauffeur knowledge. You have to figure out where you have got an advantage. And you have to remain within your own circle of competence. How do you recognize the difference? There is a clean indicator: true experts recognize the limits of what they know and what they do not know.

NEWS ANCHORS put their knowledge on a show to drive profit for corporations. Generally chauffeur knowledge is extremely magnetic and immediately fits into the mind. That is why we DON’T TAKE THEM SERIOUSLY.

Better to stay away from any temptations and strive to gain real knowledge on the subject. Sometime, it may sound boring but true and fact knowledge is worth more than sweet and fancy talks.

Dear Patrons,

Case Study of Olympic swimmer Michael Phelps

In grade 6th, Michael Phelps was diagnosed with ADHD (Attention deficit hyperactivity disorder). His teacher told his mother, “Michael can’t sit still. Michael can’t be quiet…. He’s not gifted. Your son will never be able to focus on anything.” Bob Bowman, his swimming coach since age 11, reported that as kid Michael spent a lot of time on the side of the pool as punishment for his disruptive behaviour.

In spite of this, in 2012 London Olympic Games. He brought his total medal count to 22 and earned him the status of most-decorated Olympian in any sport in history.

From age 11 to the Beijing Olympics, Phelps trained seven days a week, 365 days a year. He figured that by training on Sundays, he got a 52- training-day advantage on the competition. He spent up to six hours in the water each day.

Our life gets much clearer and less complicated when we know what we have to do well and what we don’t have to do at all. In Investment scenario, we often loose focus and discipline. Any asset giving better returns distracts our attention. Fundamental investment rules do not change overnight. To fight this uncertainty, focus on what you do & keep discipline in your action.

Focus and discipline are the exact reason why Mutual Funds are one of the best investment tools. Don’t let other short term scenarios distract us from creating wealth.

Dear Patrons,

Cows don’t give milk. Really!!!… They don’t.

A farmer used to say to his children when they were young, “When you all reach the age of 12, I will tell you the secret of life”. When the oldest turned 12, he anxiously asked about the secret.

The father said the secret of life is this: “The cow does not give milk, you have to milk it”. You have to get up at 4 in the morning, go to the field, walk through the enclosure full of dung, tie the tail, hobble the legs of the cow, sit on the stool, place the bucket and do the work yourself.”

That is the secret of life, the cow does not give milk. You milk her or you don’t get milk.

There is the generation that thinks that things are automatic and free. They have been accustomed to get whatever they want the easy way!. Life is not a matter of wishing, asking and obtaining. Happiness is the result of efforts. Lack of efforts creates frustration.

Current investing scenario is equally similar. A generation of investor has started believing about shortcuts of doubling their investments. Concept of compounding is not thought against ‘Concept of Multi baggers’. Basic principles of discipline, diversification, asset allocation etc. are still foundations of investing.

Any superior return in life needs time, it needs greater efforts, it needs skill set. Milking a cow is a skill and only few knows how to do it. Similarly, investing is a skill which strengthens through experience and by following basic fundamentals only.

Dear Patrons

WHY YOU SHOULD FORGET THE PAST!

Once I went to watch a movie. The movie was terrible. After an hour, I said to my wife, “Come on, let’s go home.” She replied, “No way. We can not waste Rs.500 like this.” I wondered, “There is no reason to stay. The money’s already gone.” But finally I surrendered and quietly completed the movie.

This is the sunk cost fallacy at work – a thinking error!

A company was running advertising campaign for four months and had not met even one of its goals. The company wanted to scrap it. The advertising manager resisted, saying: “But we’ve invested so much money in it. If we stop now, it’ll all have been for nothing.” Another victim of sunk of fallacy. Had it been scrapped in time, entire team can start working on something productive. Example of Sunk Cost Fallacy.

Supersonic Concorde is a prime example of a government deficit project. This project consumed huge amount of investments just to fail and to be retired in 2003. They continued to invest enormous sums of money in it – if only to save face. Sunk cost fallacy at institutional level.

Investors frequently fall victim to the sunk cost fallacy. Often they pivot their decisions on buying prices. When the decision fails, normal reply is “I lost so much money with this stock, I can’t sell it now”. This is irrational. The buying price should play no role. What counts is the stock’s future performance. Ironically, the more money a share loses, the more investors tend to stick by it.

Important point to drive here. Many investors hinge their investment in Mutual Fund with long term sentiments. There may be good reasons to continue investing in something but beware of doing so for the wrong reasons. Rational decision making required to check whether the schemes considered as long term are really worth to remain invested for or not. No matter how much you have already invested, you have to keep putting those schemes to a test for their performance.

If 50 Million people say something foolish, it is still foolish…

You are on your way to a movie theatre and already 10 minutes late. At an intersection, you see two men fighting for small accident. Without even thinking about it, you will too slow your vehicle to check what the matter is. Why?  Social proof.

In the movie at time of interval, you see bunch of people moving out of auditorium. You also rush out in hurry so you don’t have to wait in line at the snack counter. No matter how fast you leave, you will still reach back your seat just in time. Why? Social proof.

Social proof is the herd instinct. It is individual feel to behave same as other people. We are the direct descendants of those who copied others’ behaviour. This pattern is deeply rooted in us. The advertising industry benefits greatly from our weakness. Does a product become better because it’s most popular or it sells the most units? Be sceptical whenever a company claims like this.

Social Proof is largely visible in investment decisions. Earning better returns is always investors’ normal tendency. Whenever investment idea gains attention, it becomes suddenly appealing without any fundamental basis. Only experts can handle Investment in commodities like Wine, Coffee, paintings etc. But still large population finds such investment very attractive.

Take Virtual Currencies for example. It is biggest example of ‘Social Proof’. Suddenly we find very high interest from investors for crypto currencies. But my friend, where were you 2 years back? Time to invest in them was 2 years back. Now it is mega herd following a trend.  Remember, If 50 Million people say something foolish, it is still foolish…