Uncertainty Aversion

In the series of 21 behavioural biases we will discuss the 14^th bias “Uncertainty Aversion”

Uncertainty aversion is also known as Ambiguity aversion.

Human brain doesn’t like uncertainty. Therefore they avoid risk (which arises from uncertainty)

Risk and ambiguity are 2 different things. Risk itself is very complex and can manifest in any form, size and time. Risk is unavoidable, we can just mitigate it to best of our effort.

Otherwise there will be no accidents, injuries and failures.

Uncertainty is main factor in calculating/measuring risk. If we are relatively sure about the outcome of something (uncertainty) than risk calculation can be more precise.

Human being do take risk but when uncertainty flavour added to it, they chose risk over uncertainty.

Let take an example – There are 2 pots, Pot A and Pot B. Pot A has 50 Gold coins and Silver coins each and Pot B has 100 coins but how many of Gold and how many of silver is unknown.

If I ask you to draw a gold coin which pot will you chose? Most likely you will chose pot A since you know that it has 50 Gold coins which is more than (presumably) pot B. In second option, I ask you to draw silver coin. You are most likely to choose pot A again!! Note the error in thinkingJ. You didn’t choose pot B in both. Mind tricked you😉. In first draw you concluded that pot B has more of silver coins but despite that feeling you will chose pot A once again.

Equity investing is also perceived to be quite uncertain. It is in fact uncertain but if you invest well and mindfully, it rewards for the uncertainty very well. Equity investment has too many variables attached to it. Global and domestic economic conditions, domestic laws and regulations, changing consumption patterns and business models, Inflation, liquidity, Interest rates etc are few of many factors.

In fact, since there are too many uncertainties in equity investing, there are also great risk premium that this asset class offers. In equity investing, if you get it right, you are likely to make double returns than FDs or RDs. Albeit you must know when, how and why to Invest. Irony is property is perceived to be safer asset class where is there are risk of different types. Biggest risk which can wipe out entire capital is title of property and regulatory/municipal compliances and possession etc. Haven’t you (or someone known to you) is stuck??

FDs and RDs are the safest asset to invest in. No doubt. Unfortunately their safety feature has made it less attractive to fight inflation and rising costs.

At Wealthcare Investments, we recognise the period of extreme uncertainty/ambiguity and re-balance portfolios at opportune time. Our eyes are set on current and upcoming risk events. We are firm believer of the fact that RISK is what we should control, returns will surely follow. As Warren Buffett says “Rule # 1: Never lose money, Rule #2: Don’t forget rule # 1”.👍

What always matters in life (including investing) is your hits should be more than misses. We can proudly say that we have more hits than misses. Our existing investors are there to vouch for it. We endeavour to enhance our skills even further to give rewarding experience to our clients.

To summarise, uncertainty is part and parcel of all activities -known or unknown. Result of tasks with uncertainty are always rewarding. Adventure sports or business etc. are sufficient to prove the point. Have you seen anyone who did nothing unusual and was given big award/reward?

What should you do?

1)      Recognize that there will not crystal clear environment in Investing. Hence don’t wait for clarity to emerge.

2)      Observe and note sign of revival and start investing. Have risk lever in hand but keep investing.

3)      Great returns come from investing in most uncertain times. Don’t forget this.

4)      Appoint an advisor (if you don’t have one) who will walk with you thru entire journey. A good advisor will plan for the worst events also so that you don’t lose out on opportunity. Relationship Managers will leave you alone in some time.

MF Trivia: Mutual funds have been creating wealth for patient investors since decades. Pledge to invest more in Mutual fund in new year.

Happy Deepawali and Happy New Year – Samvat 2076

If you find our blogs helpful, pls do like and share and comment

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"

Exponential Growth

In the series of 21 behavioural biases we will discuss the 13^th bias “Exponential Growth”

As per Wall Street Journal, Exponential Growth Bias means tendency to neglect the effects of compounding growth.

We know concept of linear growth but have no idea about exponential growth.

Our ancestors imbibed the linear growth in us. They taught us doubling the working hour would result in double output! Double the food grains stored could mean double the period of consumption. Nothing wrong here!! Just add time (longer time) and reinvesting bit of saving in it. That’s compounding effect for you.

To illustrate the same with number, here how it goes-

1)      Invest 10 lakh every year @ 11% return for 10 yrs. Corpus at the end of 10 yrs – 1.67 crore

2)      Invest 10 lakh every year @ 11% return for 20 yrs. Corpus at the end of 20 yrs – 6.42 crore

Did you notice the 3.8 times jump in the corpus in 2^nd example? You might argue its misleading calculation❎. By just doubling the amt and the period, the end corpus doesn’t double but it almost quadruples. That’s power of compounding – Exponential growth magic!!

Life Insurance industry has taken full advantage of lack of knowledge of the Investors on power of compounding!! Have you ever heard an agent disclosing the compounding rate to you? They promote products basis the number of times money will grow and the simple rate of return.

You heard them saying (in all plans except ULIPs) your money will triple in 20 yrs etc or the rate of return will be 8-9% (catch here is – Its simple interest; not compounding).

Exponential growth happens with 2 elements – Return and Investment horizon. One of two alone doesn’t work magic.👍

In earlier example we saw impact of period, now let’s examine how the return impacts the final corpus

Let’s take the same example with return rate of 7%.

1)      Invest 10 lakh every year @ 7% return for 10 yrs. Corpus at the end of 10 yrs – 1.38 crore

2)      Invest 10 lakh every year @ 7% return for 20 yrs. Corpus at the end of 20 yrs – 4.1 crore

Note the huge difference in corpus at the end of 20 yrs. Whopping 2.30 crore extra!! That’s going to be large sum of money even after 20 yrs😊

In illustrations, 11% is taken as average 11% return (post tax) on equity MF and 7% is assumed Insurance return (tax free) and current FD rate. If you invest in FDs, deducting tax, your corpus will be even lesser.

If you been ignoring equity investing due to volatility, look up on internet and see how equity does in long term. In fact, longer the period better and stable are the returns from equity.

Treat Equity as your (non-biological) child. Recall what you did for your own child at the early age??

First time standing, walking, running, other meal, cycling, sending out child alone and all of that!!

All first posed a greatest risk to child!! Isn’t it?? You did that because you wished your child to be normal, succeed in life and grow to face the world. Agree??

Why not do it for your money (non-biological child)?? After all it will have to take care of you in your thick and thins. Your retirement will be dependent on very same money✔. 

I don’t intend to say put all money in equity. Use Mutual funds as tool and start with decent amount and gradually increase the allocation as you experience it.

Einstein once said compounding is the most powerful force in universe and 8^th wonder of the world.

What should you do?

1)      Recognize that over pampering is not good. Be it own child or money. You have to take risk.

2)      See the evidence of long term investing benefits of Equities.

3)      Assess if you are master in Equity Investing. If you are not, choose Mutual funds as vehicle to Invest. It’s likely to give better and smoother experience.

4)      Draw a plan for major life goals like Kids education, medical emergencies, house, retirement etc. Figure out the gap in these goal funding. Try to invest accordingly in equity to bridge those gaps.

MF Trivia: 10-15 + years performance track record of Diversified equity Mutual fund and Equity Hybrid funds (Balanced funds) has been impressively in the range of 12-15% CAGR. That’s like beating Inflation hands down.

If you find our blogs helpful, pls do like, share and comment

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"

Loss Aversion Bias

In the series of 21 behavioural biases we will discuss the 12^th bias “Loss Aversion”

Human mind is programmed to remember the bad incidents or events more profoundly than the good ones. If I ask you to recall a recent event, most of you will talk about the bad event than a good one. Mind brings forth the bad event first. In fact most people are also liking to hear the bad/sensational news!! This happens due to Loss Aversion being at mind and recalls it first.

We forego doing too many things in life due to Loss Aversion syndrome. Let’s take an example- If you were to decide to do 10 KMs marathon, you would first recall of bad consequences rather than pride, endurance and health which are very positive outcomes!! Agree??

While you are at decision making stage, you will recall, how Mr X injured or took ill due his decision of 10 KMs marathon resolution. But we don’t believe that other 100s of people who are like you, have trained themselves and done it successfully😁 . We are more sensitive to negative loss than positive gains!!

Let’s see how people behave in investing? There are people who are extremely loss averse and put all money in FDs, RDs and PPF etc. There are some who believe that property is also safe as it may not give returns but never gives losses. Do you agree? Reality is property prices also drop just that you don’t trade often and there is no price flashing on screen. Also its thinking error that property is safe as it doesn’t depreciate. Ask yourself if you are investing for capital protection or capital growth?? Let me also articulate that even equity investing is not safe and superior to Fixed Income products and Property. All I am saying is one should not be blind to safety and not consider equity investing. Allocation in various asset classes helps optimize return and mitigates risks. Also protects your wealth from evils of Inflation and provides liquidity.

“We fear loss more than we value gains” in investing, both are notional in nature until and unless we book it. People marry their loss making Investments and flirt with profit making Investments. Meaning they become short term investor in profit making investments (due to loss aversion) and stay long(est) term where there is loss.  

Loss aversion is part of our core personality and can’t be avoided or altered completely. Loss aversion comes from fear.

We must have fear and loss aversion but how much is more important!👍

At Wealthcare Investments, we pay attention to risk-reward metrics at given point of time. Our active management core is “Is market providing returns at reasonable risk or higher risk”

When we see risk is higher, we move to safety. When we see risk-reward is favorable, we take aggressive calls. If you are investing with us, you have seen that in 2013-14 (when we were bullish) and 2017-19 (when we were conservative).😊

What should you do?

1)      Remember than all asset classes have risks, velocity can be more or less.

2)      Realize that inflation beating returns are real returns. Rest is eye wash.

3)      Do not be emotional about the loss making Investments. Don’t marry them. Get rid off them quickly. It will kill anxiety in you.

4)      Avoid being speculator. Speculator looks for high returns in shorter time. Investors are patient long term players.

5)      If you loss averse and cant handle it. Don’t check your portfolio often, appoint good advisor and follow him. Some day you will learn to manage your anxiety and transform into wise investor.

MF Trivia: If you are loss averse. Not to worry there are Mutual Fund schemes which can take care of Volatility to a great extent and can provide you smooth experience over a period of time.

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"

Average Bias

In the series of 21 behavioural biases we will discuss the 11^th bias “Average Bias”

Law of Average definition as per Wikipedia is fallacious belief that a particular outcome or event is inevitable or certain simply because it is statistically possible. It is a belief that a sample's behaviour must line up with the expected value based on population statistics.

To simply understand, let take an example, suppose a normal coin is flipped 100 times. Using the law of averages, one might predict that there will be 50 heads and 50 tails. There is only an 8% chance of it occurring. Predictions based on the law of averages are even less useful if the sample does not reflect the population.

If I ask you to walk thru the river which is on average 4 feet deep. Should you walk? Most common answer is – I can walk. But wait. You missed to ask me what is highest depth? Because the depth above your height is most dangerous as you will surely drown.👍

In economic data representation this is not useful as much. For example –

1)       Average rain will be 100%. Flaw is, will all the states receive full rain? Will rain be evenly spread over sowing season/Months?

2)      Index P/E is at 28. Does it mean all companies are trading at high P/E and stock market is overvalued? Well not true. There will be many companies which are trading at very high P/E and many at historical low P/E. I am not suggesting that high P/E companies are expensive and to be sold and low P/E companies are cheap so you must buy. They are there for a reason, which only expert can understand and take informed decision.

In Investing, averages are not perfect and right barometer of state of markets. If markets are currently expensive than logically, no one should invest. Rather everyone should sell. Which in turn means, if there are no buyers and only sellers, there will be no trade and markets will hit lower circuits on daily basis till the index P/E falls to reasonable levels. Have you seen that happening? To my knowledge, Sensex and Nifty has hit upper circuit in 2009 when UPA 2 came into power. The same indices hit lower circuit on 2008 due to “Subprime crisis”. Just 2 examples in long history of Indexes.

There are lot of Investors who stay away in rising market stating it’s expensive. There are many who stay away in falling markets also.

In my view they are partially right but what they are failing to understand is, there can be pockets of opportunities which can deliver some returns. So regular Investing helps.

Why should you stay invested has a reason. You are earning and generating free cash on monthly basis which needs to be invested, surely. Now if you keep that in Bank or FD, you will lose out on wonderful opportunity of averaging the cost of investment.  

The one who is waiting on side lines, are self-styled smart Investors. They seem to understand the market than nobody else!!

My assessment of decades, has made me firmly believe that “Market is God”. We don’t know what will God do next and what’s thy plan? Same is true for markets😊

So when there is economic slowdown or crisis visible in markets, I simply move investments to low risk products to avoid vagaries of markets and protect capital. But never take cash calls on market as markets can turn the table anytime. It works well for long term investing without much shocks.

If you are not investing thru us, you can move your investments into Asset allocation funds or do STPs or SIPs till the time you judge the markets can remain volatile.

Almost all of us are victim of the Averages, little discipline can help overcome it.

What should you do?

1)      Do not judge performance of the fund merely by the average returns. Especially for sectoral funds.

2)      Try to analyse the rolling return of the fund instead of average returns.

3)      Look for range of returns (if they are consistent or varying)

4)      Check the returns v/s the risk of the portfolio. Is fund manager taking very high risk for superior performance?

5)      Look for period of bad performances and duration. If a scheme has done best in 2 yrs out 5 yrs and remaining 3 yrs were really poor. What if you need money in those bad periods?

6)      Check if the performance of the scheme is thru active trading or mindful investing?

MF Trivia: It is myth that high risk means high returns. To achieve higher returns, you need not take higher risk, follow Asset allocation, discipline and active management is more than sufficient.

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"