Tag Archives: Mutual Fund SIP

Achilles Heel

Dear Patrons,

Achilles Heel

In Greek Mythology, the King of Phthia – Peleus, falls in love with Thetis, daughter of the Sea-God Nereus and marries her. They are blessed with a son who is destined to be one of the greatest warriors in the history. The parents were told a prophecy about their son that their son would die at a young age. Worried about the well-being of her son, Thetis, takes the newborn to the river Styx. She performs a ritual to evoke the magical powers of the river water that are supposed to make her son immortal. She dips her son in the river and all the parts of his body that are immersed in the water, are blessed. Unfortunately, the heel from which Thetis held her child did not touch the water and was left vulnerable.

Time passed by and the son was than named Achilles and he indeed grew up to be the greatest warrior of his time. He was the key warrior who won the Trojan War for the Greeks.

At the end of the war however, Prince Paris of Troy shoots a poisonous arrow at Achilles that hits him at the heel and that causes the death of Achilles. The term, Achilles Heel, is hence used to describe a vulnerable point or a key weakness in an otherwise strong constitution.

For investors, Achilles Heel = Investors Ears. Metaphorically speaking, vulnerable point for any investor is their ears. All good investment ideas and plans are vulnerable to investment noise. Noise can be simply viewed as data or information flow that does not help in good decision-making process. It infact deters us from it. Every investor likens the noise to music and keeps on listening it until they realize that there is no significant gain from this data but it may be too late to realize that.

Data << Information << Experience << Knowledge.

No matter how much you feed your brain with data or information, they are only useful with enough experience. Again metaphorically speaking, Noise is to an investor what kryptonite is to Superman! It drains their powers (intellect) and makes them vulnerable.

THE EMPATHY GAP

Dear Patrons,

THE EMPATHY GAP

There are two states of mind,

The Cold state: when our mind/thinking is calm and comfortable

The Hot state: when state of mind overrun with emotions and act with impulse

Imagine you are at the supermarket on a Saturday, buying ingredients for dinner you are planning to prepare on Wednesday. If you are starving while you are shopping, you will tend to shop more than your average food quantity. This is because when you are hungry, you imagine to be starving on Wednesday too.

In the same way, if you are shopping after a meal, you will tend to shop a bit less. You will feel stuffed and cannot really imagine being starving hungry on Wednesday.

When we are in the cold state, it is difficult to imagine how we will feel and behave when we are in the hot state vice versa. We are unable to empathize with our opposite state of mind. This is called the Hot-Cold Empathy Gap.

In the cold state, we make good investment plans. We plan to buy more when the market is down, stay away from temptations, invest for long term etc. But the “Doer” in us, many a times, in the hot state of emotions does the exact opposite. We give up againsts the greed, fear and other biases that lead to inferior investment outcomes.

The investment strategy is like a diet. If the Doer in us gives up to temptations of junk and undisciplined food habits, we are not getting any healthier.

Missing the Forest for the Trees!

Dear Patrons.

Missing the Forest for the Trees!

Belgian surrealist painter Rene Magritte is one of the painting which creates lot of curiosity among the viewers. Name of it is “THE SON OF MAN” (Google it). There is an encrypted message in it. (Read further only if you have google the image).

At first glance, most people would naturally be curious about the face that is hidden by an apple. One can see the face partially but it’s still quite difficult to identify the man. What does the apple signify? What exactly the painting trying to convey for human behavior? For most people, the mind initially focused only on the face. The face is the only thing which is “visibly hidden’.

It is about the psychology of attention and how important it is in the field of investing. Investors often focus on the high frequency short term news / noise and miss out on the long-term goals.

The artist wants to decode a message from the painting which is The closer you look… The lesser you see!!!

Attention is scarce and there is enough noise in the financial markets to keep investors distracted from their core investment process. Here I use ‘noise’ as representative of data / news flow /small events which ideally should not have a significant impact on the investors’ decision-making process. However, noise does take focus away from long term investing and leads to shrinkage of investment horizons. Noise creates excitement and anxiety; and induces participants to trade more. That is the reason for us to remain focused to disciplined investment and control behavior in volatile times.

Procrastination is idiotic.

Dear Patrons,

Procrastination is idiotic.

Psychologist Roy Baumeister did a clever psychology experiment on his students. He has put a group of students in front of an oven in which delicious pizzas were baking. Delicious scent cheese blew around the room. Students expected that they will get to eat those pizzas. However, Roy then placed a bowl filled with mashed potatoes and told students that they could eat as much of these as they want, but they cannot eat the pizzas.

Students in a second group were allowed to eat as many pizzas as they wanted.

He then left the students alone in the room for thirty minutes.

Afterward, both groups had been invited to solve a tough math problems. The students who were forbidden to eat pizzas gave up on the maths problem twice as fast as compared to those who were allowed to eat freely on pizzas.

The period of self-control had drained their mental energy which they now needed to solve the problem.

Same way the more you procrastinate about a task, the more energy you are actually wasting in it because no project completes itself.

Many tax payers delay / procrastinate investing in tax saving instruments of 80C till the last possible day of March of any financial year. It actually bears no fruits as the efforts and stress one gives on last moment could have been easily saved by just investing the same amount in the beginning of the year. For any investment, simplicity is more important than complexity.