Dear Patrons,

THINKING PROCESS VERSUS OUTCOME

Lot of Indian cricket fans remember the Hero Cup match between India and South Africa on November 24, 1993 at Eden Gardens in Kolkata. South Africa needed 6 six runs off the last over to win the match. There was an intense discussion between the players and the captain about who should bowl the last over.

All the regular bowlers Kapil Dev, Srinath, Prabhakar and Ankola, had some overs left to bowl. After consultations, the Captain decided to hand over the ball to the 21-year-old Sachin Tendulkar. Sachin was a star batsman, but the whole Eden Gardens was shocked as he came out to bowl the last over. That overturned out to be magical! Sachin got a run out and restricted the batsmen to only 3 runs resulting in India’s victory by 2 runs.

Let’s imagine what if… South Africa had scored quickly and won the game easily. What would be the reaction of the crowd, the media and the experts? Would anyone have spared the captain of severe criticism for such a bold decision that went wrong? Even the captain give any justification, would people care to listen to or believe the justification?

We tend to focus on the outcome to judge whether the decision was right or wrong. However, the decision-making process becomes more important. In the context of equity investing, stock market is always volatile and uncertain but investors only chase the certain outcome and in that process is forgotten.

INVESTORS DON’T NEED TO GET IT RIGHT ALL THE TIME.

No one can get it right all the time. Investment decision-making is about considering the payoffs and their probabilities. The right investment process will provide the right combination of both the factors in a way that brings higher upside when you are right and lower downside when you go wrong.

Following Process >>>> Chasing certain outcome

Nishit Siddharth Shah

Dear Patrons,

Borrowing Shoes to look Rich

In 1888, in Curacao, a Dutch Caribbean island, A bridge was built to connect two parts of the city. A toll tax was proposed but officials wanted it to be a “progressive” tax. So, they decided rich people will pay more to cross the bridge.

So how to identify rich and poor quickly?

They had an idea, rich people wear shoes (its 1888, remember), so they decided to charge a tax based on that. If anyone cross the bridge wearing shoes, he pays a tax, but if he is barefoot, he can cross the bridge for free. This format was Simple, Easy and Brilliant idea… But it failed miserably.

Why? What happened to this progressive idea? A good learning here, the rich always wanted to avoid tax so they simply took off their shoes and crossed the bridge. Paid no tax.

While the poor did not want to be seen as poor. They wanted to show off their status by crossing the bridge wearing shoes, so they wore shoes by buying it or borrowed the shoes to cross the bridge.

The lesson is… Rich stay rich by awareness on cash outflow. Poor stays poor by spending more. Interestingly even in today’s time, we find humans are irrational in spending habits.

The entire behavior is called Hyperbolic Discounting…

Those who are not Rich still wants to show their status to the world. They live by one line ‘Live as if no tomorrow’. They reward their own selves on instantaneous and short term achievements. This zest keep them in a trap of continued borrowing stuff which they actually don’t need.

While Rich people have thought process based on vision and wisdom. They only think of long term and think about their tomorrow irrespective of their social status. This behavioural psychology is the key of successful investor.

Are we wanted to be a rich & wealthy through investments or a person who just “borrows shoes” to cross any “bridge?”

Nishit Siddharth Shah

Dear Patrons,

S.O.S.: Slower, Older and Smarter.

“An Airbus 380 is on its way across the Atlantic. It flies consistently at 1000 kmph at 35,000 feet, when suddenly a Eurofighter Typhoon fighter jet appears.

The pilot of the fighter jet slows down, flies alongside the Airbus and greets the pilot of the passenger plane by radio: “Airbus, boring flight isn’t it? Now have a look here!”

He rolls his jet on its back, accelerates, breaks through the sound barrier, rises rapidly to a height, and then dives down almost to sea level in a breath-taking dive. He loops back next to the Airbus and asks, “Well, how was that?”

The Airbus pilot answers: “Very impressive, but watch this!”

The jet pilot watches the Airbus, but nothing happens. It continues to fly straight, at the same speed. After 15 minutes, the Airbus pilot radios, “Well, how was that? Confused jet pilot asks, “What did you do?”

The AirBus pilot laughs and says, “I got up, stretched my legs, walked to the back of the aircraft to use the washroom, then got a cup of coffee and a chocolate fudge pastry.

The moral of the story is: When you’re young, speed and adrenaline seems to be great. But as you get wiser, you learn that comfort and peace are more important.

A young investor may find it exciting and thrilling by investing in smallcap stock tips, equity derivatives, crypto currencies etc. But a wise investor has learnt from the experience that thrill and excitement is temporary so they prefer consistent and long term investment which my sound boring at first but it is the most suitable of all.

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.

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.

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.