Inductive Bias
In the series of 21 behavioural biases we will discuss the 4th
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"
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