Wealthcare Investments

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

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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"