Wealthcare Investments

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"