Investing is simple but not easy. It looks simple as it is all about buying at lower price and selling at higher price. However, most investors end up doing the opposite. The reason for this is emotions and biases that lead to problems in decision making, said Nimesh Chandan, Head - Investment, Equities, Canara Robeco MF at the Cafemutual Confluence 2020 Investment Marathon,
Nimesh talked about how emotions prevent investors from taking the best financial decisions.
To explain how emotional biases come in the way of investors, Nimesh talked about the change in investor sentiment since the beginning of this year dividing it into three phases.
“The first phase was February when the coronavirus outburst had just begun in India. At this time, investors were gripped with fear and worried about growth. Yet many investors took this as an opportunity to actually buy more,” said Nimesh.
The phase two was when the market hit its bottom in March and investor sentiment changed completely. He said that fall in prices reinforced investors’ fears. Usually, when panic strikes, investors sell everything and forget about asset allocation and investment rules. About 40% investors were under confident and chose to sell and redeem money during this time, Nimesh added.
And phase three was when the market recovered months later. “In July and August, a record number of new demat accounts were opened, retail trading volumes went up substantially and people even traded in futures & options.”
A herd mentality developed among investors as they started chasing volume and price breakouts. They bought hot stocks. And somehow valuations did not matter. People took bigger risks like gamblers to make money after initial gains.
These three phases show that people do exactly the opposite of what they should, which is buy high and sell low.
Further, he narrated 4 stories to overcome behavioral biases.
1 Grace Groner
She was a lady from Chicago who started looking for a job in the 1930s. This was when the world was going through a recession. She got a job as a secretary in a pharma company. She continued in that job for 43 years. Over the years, she did not marry or had kids or any possessions like cars.
Besides, she had not invested a single penny early in her career, but in 1930 she invested $180 in stocks. Further, she kept adding dividends into her stock account.
She had made a will that after her death, her stocks and money should go to her alma mater, her school. She lived 100 years and passed away in 2010.
When the school principal got the cheque, he was in for a big surprise- it was for a whopping $7 million!
Lesson here is her investment benefitted from the power of compounding in the long term. So always focus on long term and avoid short term noise.
2 Rahul Dravid, best test cricket player
Dravid has faced the most number of deliveries in the world - 31,000 deliveries of which 23000 were dot balls. Yet he went on to score more than 10,000 runs.
This shows that he was defensive most of the time and took opportunity only when the juicy delivery came in. The investment lesson here is to have patience and strike only when the odds are in your favour.
3 Viswanathan Anand, chess champion
If you read his autobiography, you will get to know about his intense preparation before matches. He goes through all previous matches of great players to learn how they played. He used to error check his moves and maintain a chess log about why he is making such a decision.
Adding to it, he used technology in his favour to calculate his moves better at a time when other players were not open to this idea.
One can learn to prepare and research well from him.
4 Greek Mythology
War of Troy and Trojan horse. Odyssey was the Greek hero who conceived the idea of Trojan horse and executed it. After winning the war in Troy, he was warned that he would be harmed because he was passing through an island which has Siren.
Sirens look like beautiful women who sing beautiful songs to lure passerby (sailors). Once sailors visit their island, Sirens rob and kill them brutally.
Odyssey was prepared for it. He put beeswax in the ears of sailors so they could not hear Sirens. However, he wanted to listen to the music and hence, he asked his sailors to tie him to the mast of the ship and no matter how much he yelled, they were not to untie him. In the end, he reached his island safely because of his planning.
The lesson is to have self-control. While self-control is difficult, make a plan and pre commit. Make commitments to buy at certain market level, events and put self-triggers to sell at certain events or levels.
For instance, SIP is best as it is pre committed.
