Self Serving Bias

In the series of 21 behavioural biases we will discuss the 6^th bias “Self Serving Bias”

Self-serving bias defined by science theories as “feels good” effect and doesn’t seem to be doing any great harm!

Self-serving bias makes one take (un)due credit of achievements, which leads to an (over)confident personality trait.

We attribute success to us and failures to external factors/others.

Negative example of this bias - it can lead a person to depression if he/she feels that all that went wrong was just because of him/herself. External factors had no role to play.

Let’s take few examples – If a child does well in exam, it attributes the same to self and if didn’t do well than blames it to external factors!! If you have done extremely well in business this year, you take pride of your hard work, focus, strategy and attitude and blame it to market for your bad performance. Have you ever heard a person involved in accident takes blames on self?? I never met anyone who admitted to me that, in that accident, it was self to blame rather than other party. Am I making sense??

We love to be recognized as I know everything, I am good at it. Self servicing bias is defense mechanism to protect your self-esteem. Positive attitude is good but realistic attitude is best. Realistic person is able to define own competencies and area of improvements. Recognizing the problem itself is a good beginning.

Similar errors are made in investing also. If your portfolio has done exceedingly well in 1 year, you tend to feel more proud of your decision and grip on market rather than your advisor!! In the reverse situation, you blame all to the advisor. What you did here is used the defense mechanism to protect your self-esteem. That isn’t right!! If you continue to blame others for unexpected results than you will find yourself alone in the end! You will tend to lose good people around you.

In Investment management business, you will find many advisors or advisory firms, institutions who are victim of self servicing bias. They do not admit their error and blame it to market or Investors, when there is loss. At the end these outfits will lose their priced clients.

These outfits serve what is relevant to the mood of the market and not what is good for 2-3 yrs ahead. They are probably playing on your recency bias J.

During 2017 and 2018, lot of these outfits were gung-ho on Small and Midcap space. After crazy losses in investor’s portfolio, they either disappeared or citing market conditions!! Come on guys, you can’t do this!! If Investor was smart and could see thru future, he will not seek your advice!!!  Surely, they need not be right every time but they should have advised basis due research. Currently in low markets, these outfits are dishing out capital Protection oriented funds and such products.

I feel they are going to get it wrong even this time. We did exactly opposite since over 2 yrs. Since Mid ‘17 we moved out of small and midcap to Balanced Advantage, Equity Savings and Balanced funds. Now since 6 months depending upon horizon and risk appetite, we are building positions in Small, Midcap or Multicap.

When we decide and act on something, there are invariably 2 possible outcomes- Positive and negative or expected and unexpected. Wise person is one who accepts both with modesty and humility. We at Wealthcare Investments also made a few error of judgements in selecting funds. But we recognized the same and corrected in time. Our Investors appreciated the same!! Blaming external factors or others only restricts one from learning from that incident.

What should you do?

1)      Recognize that self-serving leads to counterproductive results.

2)      Don’t Invest in something that makes you feel good. Challenge it!! Warren Buffett says” what is comforting is rarely rewarding”.

3)      Update yourself, regularly, with all developments. If you don’t have time or ability, sit with your advisor and understand.

4)      Avoid “I know everything”. Be a student.

5)      Investment should be non emotional activity. Don’t overdo with your money on pamper and safety. Take some calculated risk for extra growth. FDs, RDs, Gold, Property and LIC may be good but can’t ignore equity as an asset class. Start with 10% of Investible surplus and experience equity investing. If beginner, try Mutual funds over direct stocks.

6)      Write your rationale of Investing, analyse the same with results and avoid committing same errors in future.

7)      Appoint an advisor. Right advice at right time can give desired results.

MF Trivia: Your short term Goals like new car or vacations can be easily planned with Mutual fund investing. You need not have to Invest in FDs or RDs only.

This article is written by Bhavesh D Damania founder of Wealthcare Investments.

You can reach him at 9833778887 and wealthcarein@gmail.com

"Risk comes until you know what, where and why you are Investing"

Recency and Primacy Effect

In the series of 21 behavioural biases we will discuss the 5^th bias “Recency and Primacy Effect”

Recency effect makes person recall the recent incident and Primacy effect makes person recall the first incident.

Our brain is programmed to remember bad, sensational and recent!!

Ever wonder why all TV channels, newspapers are so sensational. Because research says people like sensation more than the content. Try watching Doordarshan channels- they give same news but “without masala” and they suffer from low TRPs and advertisement revenue.

You need not consume what is “hot selling” rather you should consume what suits you. Understand 

the difference.

Recency effect plays major role in Investing. Example – Recent fall, currency spike, J&K news, Trade war etc deters you to Invest or stay invested. Am I right? This happens because, for every bad news, our survival brain works and human brains stops working! Survival brain orders us to take flight to safety.

Take another case. When are you willing to invest the most? Most likely answer - when there is overall positivity in economy!! When all news channels, experts, every guy on the street is talking about investing. Isn’t it???

Trust me, the best time to Invest will be when there is lot of pessimism and negativity. During these times, the markets are really cheap and good stocks are available at cheap/reasonable price. This is provided the outlook of particular Investment and or economy is expected to be good.

Good Investing experience of past (the Primacy effect) also takes back seat and makes you nervous at trying times.

Data shows that Maximum number of Demat A/cs, Maximum inflows in Mutual Funds, Maximum buying of shares by gullible Investors happens at the peak of markets!!

Same is true for the Property and Gold also. Lot of people bought property and Gold around 2010 – 13. Now that the Gold is scaling new highs, people may turn to Gold for Investing. Ha ha ha.

While Gold may still do well, property is unlikely to do well in next 3-5 yrs.  Please do not take this as my advice and act. Do your own research or consult an expert.

Why I feel equity should do well now?

Investors who have invested Lumpsum money over last 3 yrs have made less return or no returns. Investors flocked into small and Midcap funds during this period are seating on huge losses!! Returns of Small and Midcap indices are (-) 12% and 2.6% over last 3 yrs (as on 22^nd Aug 19). SIP and EPF flows are intact, Govt and RBI is mulling stimulus for growth, Earning must revive sooner than later etc.

Basis Investor’s risk appetite and time horizon, we at Wealthcare Investments have started to move monies from Balanced, Balanced Advantage etc (we parked monies in these funds since 24-30 months) funds to pure equity funds like Multicap, Midcap and Small cap via STP route.

Why I feel even Debt funds should do well now?

Take a look at what happened with Debt market! Since Sept 18, the flow of bad news are not stopping. More and more companies are being downgraded and defaulting. It all started with IL&FS and not sure who will be the last. Recent returns of most of debt funds have been worst. That’s recency effect! But there is silver lining on horizon even in debt space. RBI is hinting at rate cut and urging Banks to pass on the rate cut. Govt and RBI both recognised growth as immediate issue to tackle. Lowering Interest rate is well known medicine for propelling growth. If Interest rates come down drastically over 12-18 months, than even debt funds can give super returns compared to FDs.

To sum up, Recency and Primacy effect, makes you believe what happened now is going happen permanently. That’s not true in life or Investing. Good luck don’t stay for ever and even Bad luck don’t stay for ever. Same is true for even markets. Markets don’t stay up permanently or go down permanently. Do you agree??

What should you do?

1)      Don’t get deceived by recent news. Try to make sense out of these news.

2)      Ignore the noise of recent developments and read history of financial markets and make inferences. You will see that best time to Invest is when everyone is selling. Warren Buffett also advocates the same.

3)      Think if India would do well in future or not. Investment returns are tied to the nation’s prosperity and growth.

4)      Avoid bottom fishing in stocks. They are there for a reason. Stock at 52 weeks low or 90% down does not necessarily be attractive.

5)      Take a look and your existing portfolio and see what can be moved to make most of the current opportunity.

6)      If not sure about market still? Stagger your investments instead of Lumpsum.

7)      Appoint an advisor. It pays to have someone monitor and advice on your portfolio.

MF Trivia: In India, Mutual Funds Investment universe is among top 500 companies by market capitalisation. Which means MF can’t invest in penny stocks which leads to large capital erosion. To make it more secured, MF have to follow limit of % of AUM that it can invest in particular security/stock

This article is written by Bhavesh D Damania founder of Wealthcare Investments.

You can reach him at 9833778887 and wealthcarein@gmail.com

"Risk comes until you know what, where and why you are Investing"

Inductive Bias

In the series of 21 behavioural biases we will discuss the 4^th bias “Inductive Bias”

Inductive bias is also known as Prediction bias.

Predictions or forecasts are made on almost everything: mood, behaviour, weather, sports,people, politics et al.

Let’s understand how predictions are made. The science behind the predictions are based on assessment and analysis of wide number of data/ information which is simulated and a pattern is drawn. While predicting something, larger the data better are the chance of analysis and therefore the prediction. Agree??

Induction or prediction is reliable science and used widely by Governments, organisations, families etc. Artificial Intelligence (AI) is based on this science only. Only caveat is – data should be reliable, large and comprehensive.

In investing too, Inductive thinking plays an important role. Let’s examine. You hear people say markets, a particular stock/MF, Property or Gold will particularly do well in bullish trend and vice versa. The conclusion is based on recent data or trend analysis!!

You very well know the outcome of such predictions! More often, they are wrong.

What went wrong here? The error - judgement was made on recent trends and not large, reliable and comprehensive data.

In Investing there are millions of mind working and acting, where Inductive thinking has limited scope of favorable outcome.

Also in Investing it’s said “If you invest where everyone is investing, you will get what everyone will get.” You will either make poor returns or no returns.

Current market sentiments are very bearish. Weak auto sales, NBFC crisis, NPAs, low earning growth, Global headwinds etc.

Layman will conclude that it’s all over and world will collapse along with India too. No monies can be made now. Smart guy assesses these data and concludes that almost all bad news are known by market and discounted. Things can still get worst but it is near bottom now. Smart guy will invest and is likely to make bumper returns (over longer period of time).

Currently, where all can you invest? Barring Debt fund and Gold nothing seem to give better returns than FDs!! Many large distribution houses are recommending AIFs and exotic investment structures to their HNI clients. Few Ultra HNIs are investing in start-ups (a new buzz word). Hit rate of start-ups is less than 1% which means out of 100 start-ups floated, only 1 turns out to be profitable.

My strategy with my investors is old and proven wealth creation model of Mutual Funds!! Invest in something which you understand, monitor and can act in adversity (liquidity). It’s time tested wealth creation model so far! Why go anywhere else?

Inductive bias is also hard to give away.

What should you do?

1)      Remember “Certainties are provisional”. If investment returns are stable, it’s likely that they are inadequate.

2)      Recognize the fact that recent performance of asset class are most likely to not sustain too long. However long performance history does matter!!

3)      Check if the data that you analysed are complete and quality.

4)      Be contrarian. Do not extrapolate the good performance as well as bad performance of asset. In current bad market, think of positives also. That will give you balanced and realistic outlook.

5)      Avoid Do It Yourself. It can be really bad in Investing. Hire advisor.

6)      Stay confident on your course as you are not walking with crowd hence fear may grip you. Avoid loud market opinions/noises.

MF Trivia: In India, Mutual Funds came into existence since 1963 with enactment of UTI Act. Since 1993 private sector Asset Management companies also came into existence. SEBI is regulating the industry since 1996. Mutual Fund Industry has over 2 decades of impressive performance track record.

This article is written by Bhavesh D Damania founder of Wealthcare Investments.

You can reach him at 9833778887 and wealthcarein@gmail.com

"Risk comes until you know what, where and why you are Investing"

Over confidence Bias

In the series of 21 behavioural biases we will discuss the 3^rd bias “Over confidence Bias”

Over confidence is common word and needs no explanation.

Lets take an example – If I ask you to confirm if you are good a speaker or a cook? Most of you will say “YES”

Saying yes is still not wrong answer!! You could be good at it, but that’s thru your own judgement or social proof. Most often than not its your “own judgement.” Human being usually over estimates own skills and judgement. Research reveal that over confidence bias is not only present in optimistic people but in pessimistic people also. Men are more victim of over confidence bias than women (consult your wife while you decide on important matters. Ha ha ha).

You feel that because your mind is positive and optimistic. What is missing here is realistic approach.

Over confidence kills the student in you and also kills your growth prospects as you are unwilling to learn and develop.

In investing also a similar error is made! You decide on an Investment opportunity and many times, the over confidence bias plays bigger role. There could also be social proof that triggers your over confidence bias.

An over confident person tends to take bigger bets. Let’s examine – You figured out that a particular stock or MF scheme is likely to do well. You will tend to invest more money because you are confident about the outlook of returns. Whether it was confidence or over confidence – time only will tell.

In 2017 and 2018 when the markets were doing great and all past returns were attractive, I got more money from Investors. I had tough time convincing them to adopt the conservative path of Investing. I said it’s time to walk and conserve energy (conserve capital) rather than running (chasing returns). My strategy paid off. More and more people were wanting to Invest in Small and Midcap funds.

Investors got over confident as TV, Print and everyone (including Banks, large distribution houses, brokerage firms and Individuals like me) were painting great outlook for the market. The evidence is that Mutual Funds received very high inflows during last 2 yrs. What happened in last 2 yrs is for all of us to see. People have hardly made any returns since 2 yrs.

Now the same investor is over confident that there is no money to be made in future also.

I don’t agree even now. I feel if you invest wisely, there is high probability to make money hereon.

What should you do?

11)      Under estimate your own wisdom as that leads to learning.

22)      Ask yourself if I am really an expert on Investing?

33)      Ask yourself if the person I am following is an expert (friends, relatives, colleagues)

44)      Are my objectives aligned with who am I investing thru? My advisor.

55)      Avoid Do It Yourself. It can be really bad in Investing.

66)      Keep margin of safety and also pay attention to risks associated to that Investment.

77)      Look for trend from long history, data and situations before you decide to Invest.

MF Trivia: In India, your investments in Mutual funds are held under trust which has no business activities. Mutual funds can't leverage also. Therefore it’s safe and can’t go bankrupt like many companies.

This article is written by Bhavesh D Damania founder of Wealthcare Investments.

You can reach him at 9833778887 and wealthcarein@gmail.com

"Risk comes until you know what, where and why you are Investing"