Framing Effect

In the series of 21 behavioural biases we will discuss the 10^th bias “Framing Effect”

Framing in simple terms can be defined as how you present a piece of information or data that drives the desired results.

Communication is key to successful relationship and business. How you frame your communication is the important key than the, intrinsic value of the product.

You could find many examples of the same in our routine life in dealing with family members or the outside world.

Companies advertise positive effects of the product and services which could be lesser than the negative effects. Entire FMCG business has used word “New and Improved” and “Free” so extensively to re-brand and re-position their products.

Consultative sales became more popular in today’s information rich world.

Brick and mortar retailers are focusing more on the consultative/need based sales techniques. Here the online giants are struggling to deal with.

How framing is done? Let’s take an example. If I say that the Movie A is just 1 star less and movie B is 4 star. Which one will you choose? Most likely you will chose movie B which is 4 star. Actually both the movies are rated sameJ. Our mind analyses information differently and may not be rationally.

Same is true in Investing also!!

When markets are in bear phase, all communications are pessimistic and gloomy. Investor reactions are also same. They stay away from Investing. When markets move into bull phase, suddenly all investors flock into markets. Actually reverse should have been done. Framing of communication by media drives the Investor’s behaviour. Advisor is must have to make sense, in current information rich world.

In our industry of Investment advisory, most of the advisors frame their communication on the returns of the product and that’s about it!! Investors are also driven by the same eventually. Nothing wrong isn’t it??

At Wealthcare Investments, we pay attention to risk also. We firmly believe that high return is worth considering provided the risk is reasonable. Unreasonably high risk only increases jitter rather than return. We felt that markets are expensive since 2 yrs and avoided Small & Midcap funds completely. Now in my TV shows and Blogs, I maintained that market should do well hereon and started to deploy aggressively in Equities. Announcement by FM on last Friday, is something that was unexpected and historical. Whole market and corporate India was taken by surprise by with that.

We design portfolio basis the risk presented in markets. More attention to Micro economic factors (domestic) than Macro economic factors (Global). Needless to say, we do consider individual’s goals, risk appetite and time horizon!!

So in nutshell, seller designs communication such a way that positives are projected more prominently. Consumers/Investors have to be mindful of the same and make good judgement.

What should you do?

1)      Understand that each and every communication is framed to advantage of the service provider and you can’t avoid it. You should recognize the same in Investing.

2)      Try to think contradicting style. Ask if the market is cheap or expensive? What stage of the market we are in?

3)      Research for information which is not in headlines and make sense out of it.

4)      Hire financial advisor who is capable of doing the job. Not all advisors are smart to understand the marketsL.

5)      Avoid copying what others are doing!! What majority does is not prudent and rewarding in investing.

MF Trivia: There are equity oriented Mutual funds which protects reasonable amount of downside of equity fall. If markets fall over 10% in 1 year, such schemes may actually deliver 0-3% absolute returns over the same periods. Meaning no loss to capital, but infact some gain.

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"

Outcome Bias

In the series of 21 behavioural biases we will discuss the 9^th bias “Outcome Bias”

Human mind being optimistic, expects all the results (outcomes) to be favourable. In other words “as desired”. Gut feel is the major reason for outcome bias and not scientific/rational approach.

Being optimistic is good but it’s best to be realistic. Life coach and trainers have also moved focus from training to be optimistic to being realistic.

Optimistic has heart at play while realistic has mind at play.

Amateur gambler/punter are largely outcome biased, they play till they get it right at their bets and eventually incur heavy losses!! But a great gambler learns thru his games, and becomes master!!

In investing also outcome bias plays significant role. Outcome bias leads to inaction on process also. Some people are so emotional about their process or decision that they become optimistic for life- they never correct their mistakes and stay invested.

I know people who are still invested (be it stocks/ MFs or properties) despite the fact that the returns are negative/sub par. The reasons they cite is - “Kabhi to upar aayega” “itna wait kiya hai aur kar lege” “yeh to bas revive hone hi wala hai”

Returns and risks are not dependent on your perspective, they are dependent on various other factors. Recognize this fact.

Many Indians feel safe in fixed return Investments like FDs, Post Office and LIC. They fail to recognize the general inflation and life style inflation. Unfortunately, side effect of Inflation itself is not well understood by many L.

On the other hand, many feels that a stock corrected by 70-90% are good buy and they are averaging the cost!! Many are still not booking profits after crazy run in few stocks but buying more!

I was also victim of the outcome bias as an investor, made many mistakes in past.

As an Investment manager, I had few calls which went wrong! We churn a portfolio basis the performance, but we do give 2-4 yrs time. Revisit our investment rationale and evaluate the performance. Post which we take decision and move on!!

I humbly admit, I do have share of my own misjudgment. Few MF schemes didn’t perform as expected and we had to move on!

My success rate is more than failures, that’s why we proudly have patron investors with us and their references   .

Best performing funds keep changing every year so we really don’t pay too much attention. We pay attention to Investment process, mandate of scheme and thought process.

So in conclusion, outcome Bias leads to poor decision making and the same repeats if the corrective actions are not taken.

What should you do?

1)      Do not stick to your option. Examine option B also.

2)      Emphasize on process rather than Gut feeling.

3)      Ask yourself if it’s better to consult an expert?

4)      Recall if there was need to take decision? If yes, have you taken decision at right time?

5)      Avoid headline is newspaper and TV. They are usually current and hot which may not be suitable for your long term investing goals.

MF Trivia: Mutual Fund schemes are open ended where you can invest for any period i.e. life -long also. There is no maturity date like FDs, RDs or Insurance policies. So you can redeem money only when you need. Closed ended MF schemes are also available with specific maturity date.

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"

Availability Bias

In the series of 21 behavioural biases we will discuss the 8^th bias “Availability Bias”

Availability of data, information and experience is the base of the decision being taken by anyone. 

Human mind prefers information which is easily available.

Nothing seems to be wrong here!! Isn’t it??

If you note, what is missing is –We do not seek out for information or knowledge which is relevant. Rather we rely on what is available to us. In other words we don’t seek ways of doing things differently. The new data, information and other’s experience is not given more importance. The hunger of appropriate and new solution is missing. Law of inertia!!

Don’t we hear people say and do “Hum to aise hi karte hai”  or “Aisa hi sikhaya hai”

“Hamara tareeka hi sahi hai” or “Jyada hoshiyaar ban raha hai”

Lots of people lost their job and career because they didn’t acquire new skills and methods. They didn’t re-invent themselves and became redundant.

Same applies in Investing also. Large population of Indians are Investing in traditional Investment vehicles like Gold, Property, FDs, LIC and Post office. They follow it as their elders were doing it. Elders were right because, those days, that was the only option available to them.

If one continues to do that in future, he is certainly mitigating capital risk but increasing other risk (although property and gold does carry capital risk)

1) Inflation risk.

2) Concentration risk. No or low diversification across asset classes

3) Inability in Meeting with ever increasing cost  - Lifestyle ,Health, higher education cost etc

4) No or low retirement fund

5) Liquidity

With technology and sophistication, new products and options are available but one is not willing to adopt to it. Many have adopted to it with borrowed conviction.

There has been transformation in Investment landscape since few yrs. Many time tested research, Investment styles and quants are available now that aim to make investing smooth and rewarding. Albeit, you should know what you need and look for solution to that.

Someone who is averse to risk and prefers no/low risk of default and steady returns can certainly consider Banking & PSU debt fund or high quality short term bond funds. These funds can easily give better returns over FDs with tax efficiency if invested for 3 yrs plus.

Someone who is seeking returns more than Debt fund but can’t digest volatility of equity, can consider asset allocator funds.

Someone who prefers Gold, equity and debt in portfolio to avert risk or wish to diversify – Mutual fund has it.

For HNI and Ultra HNIs, there are sophisticated products based on quant and derivatives too along with start-up investing etc.

I met lot of people who are not able to recognise the evils of Inflation and its effect on his corpus. They will surely fall short at the time of major expenses or retirement.

What should you do?

1)      Recognize what you have not considered in your thought process.

2)      Think of products that are not in your basket of Investment.

3)      Avoid tilt to physical assets like Gold and Property. Have open mind

4)      Evaluate taxation and liquidity in your Investment decision. Look for products with enhanced tax efficiency and liquidity.

5)      Don’t rely on easy information. Dive deep into subject and evaluate. Easy is hardly rewarding.

6)      If you are beginner, start with simple products than gradually move up the ladder of complexity.

7)      Gain perspective from someone who is doing it successfully since years.

MF Trivia: Besides Equity and debt, Mutual Funds can also invests in Gold and Real estate (thru REITs and InvITs). So it has basket of all asset classes that appeals to all Investors.

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"

Reversion to mean

In the series of 21 behavioral biases we will discuss the 7^th bias “Reversion to mean”

Reversion to mean as commonly known as “regression to mean” or “mean reversion”

This is a statistical tool which helps in data inferences and is widely known phenomenon.

Pendulum movement is an example.

Still, let’s take an example – Cricket is favorite sport of Indians and let’s talk about that!!

We expect Dhoni, Virat and Shikhar to score a century in every match or show up a match winning performance. How many times do they do? Statistical analysis of their past data shows they will perform average of their own past averages. We troll them for poor performance and praise them for great performance. Does Punishment or rewards leads to performance improvement? Yes and No. Yes, it may improve it for next few matches. No, as it will revert to his mean performance with, may be, little better average.

Reversion to mean is ignored by most Investors. Not only Investors but even by Business owners/ Industrialists!

Till 2008, when India was growing at fastest pace, many industrialists announced capacity expansion plans and invested heavily. Since then and till today most industries are suffering from excess capacity and are debt ridden. Many established business families have gone bankrupt!! Builders also thought the same and leveraged and announced real estate project, one after another. You know what situation they are in today!!

Industries and builders thought that the robust demand and growth will only accelerate. They missed the phenomenon of reversion to mean!!

India is facing the same situation today, after good growth for many years, (and with few lose ends of reckless credit, corruption, policy paralysis etc of past) is slowing down considerably. It will have to revert to its mean performance of real GDP growth of 10-12% sooner or later. With stable global outlook, it should happen sooner.

I come across many investors who are victim of the same and ask me:

1)      Which is best performing scheme?

2)      Why our scheme is not in top quartile?

3)      Market is in bear grip so let’s not invest now

4)      So much blood bath, lets invest in safe products now

5)      I will invest when market is going up.

We at Wealthcare Investments, believe in valuation more than other factors like liquidity, foreign flows etc. We do not put too much emphasis on best performing funds/sector of last 1 or 2 yrs. There are enough data to prove that best performing fund of last 1 or 2 yrs are not in list in next 2-3 yrs. In fact some are found in third and fourth quartile too!!

We do pay attention to something else beyond that – Consistency of performance, long performance history of scheme (including fund manager and the fund house), future investment outlook and Asset allocation (tactical and fundamental).

So Investors do get succumbed to “recency bias”(if you have missed it, read my blog on same https://wealthcarein.blogspot.com/2019/08/recency-and-primacy-effect-in-series-of.html)

The belief in reversion to mean makes one cognizant of fact that he/she should know when to buy and when to sell. Often investor invests in Mutual fund schemes when they are at peak of performance and sell them when they are at bottom of performance. End result- huge loss of capital. Such investors repeats the same error and eventually never return to Mutual fund or equity investing.

What should you do?

1)      Study the stock market data closely and try to understand which stage of cycle the market is? If you can’t, engage with an advisor.

2)      Need not pay attention to articles or recommendation of best performing scheme/stock of last year. “Winner of the year syndrome is best to be avoided”

3)      Check the attributes of the Mutual fund scheme as to why it gave good return in last 1 year and will it be position to give better return in near future too?

4)      Check if the market is overvalued or undervalued with reference to future outlook and not current situation only.

5)      Examine if being contra investor helps by ignoring current hypes.

MF Trivia: Any long term Investment goals like kids marriage, retirement corpus another house etc. can be planned with Mutual Funds also. You need not have to invest in Insurance policies (with those specific names like child education or retirement plan) 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"