Neglect of Probability

In the series of 21 behavioural biases we will discuss the 18^th bias “Neglect of Probability Bias”

Every decision has probability of success and failure. Some acts where probability of success are high are worth pursing and others not worthy. Biggest issue with human minds is the positive outcomes blinds her to the risk presented. Risk is sort of ignored, to say.

Let’s take example – In casino, you have 2 tables. 1 offers 1000 for 100 bet and another offers 5000 for same bet of 100. You are most likely to choose the 2^nd option. However, rationally, you should have assessed, what are the chances of winning in 2^nd bet. Casino owner knows the human psychology and he is there to make money and not loose at all.

We often see the benefits of future rather than risk presented in an investment option!

Indians assume, buying property is safe and has returned 15-20% CAGR. For person with networth of 5-15 crore, properties are in the range of 60-80% of their networth. Many such people don’t have any other safer Investments like FDs and Gold also. They consider return as the only premise for investing. Such Investors operate in extreme spectrum. Either safe or aggressive (risk taker)

According to me, property has been riskiest investment proposition over last 10-12 yrs. Let me prove it how.

Developers have no pre-requisite criteria to start business. He can have either (not all) land, expertise, market or money. Whereas he should have expertise on all above criteria. Aren’t we familiar with delayed projects, stalled projects, cost overrun and thus unviability of project, FSI Violations, title issues, litigations, regulatory/Municipal violation, Cash tranx, Construction quality etc.

Remember value of property is half of your contribution if it’s delayed or stalled. Illiquidity is another peril.

Has Investor ever checked the profile of the Developer before investing? Isn’t it critical in Investing?

All Investors do risk checks before investing in equity, but the return outlook blinds them to check on these parameters when it comes to Property investing. That’s “Neglect of Probability”.

In financial Investing also there are errors in investing.

In Bull markets, suddenly AIFs, PMSs and structured products becomes flavour! Financial institutions and Banks dish out such products to their HNI clients who happily buy. Has anyone assessed if AIFs have indeed given sterling performance in entire tenure? Something has done well doesn’t mean it can do well in present scenario. Scenarios change and past performance can be illusive.

I saw great interest from my existing investors in 2017 and 2018 when there was boom in markets. We had to pacify them that it’s not best time to invest. We must adopt conservative approach now till market corrects. Market proved us right.   

Investor must adopt a mechanism (as you can’t create your own mechanism to evaluate risk) in consultation of his advisor. Your advisor is better placed to assess market risks and probabilities.

I know investors who find MFs risky but (un)secured lending to peers and property to be safe. You know what I mean😊 

We at Wealthcare Investments, do evaluate stages of market and believe in allocation basis that. We find value in Midcap, Small cap and Value Investing strategy. But we don’t aggressively invest in them. May be 30-40% can be allocated in this space but remaining money should be in Diversified and stable assets. Over long period the risk reward would favour our strategy over aggressive segment/sectoral bets.

As an Investor, she should spend more time on assessing probability of risk than return outlook alone. It’s said that risk can manifest from anywhere and can be brutal. So be mindful risk taker.

What should you do as Investor?

1)      Check what are the probabilities of better returns in future. Past performance don’t guarantee similar experience in future.

2)      Assess whether the Investment product has transparency in all processes.

3)      Assess if the product has liquidity. As probability of risk are higher in illiquid investments.

4)      Remember that liquid investment with 12% returns are far better than illiquid investments with 14% return.

5)      Think if the risk is worth the returns expected? High risk does not necessarily mean high return. Look for the core fundamentals before Investing.

6)      Keep margin of safety.

7)      Keep watch on your Investments at regular intervals. Take active calls when required.

MF Trivia: Mutual funds have products for all seasons and all risk profiles. If you are conservative, Mutual fund has products for you! If you are aggressive, Mutual fund has product for you as well. What’s more, Mutual funds are tightly regulated and becoming more and more transparent also.

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

Author –

Bhavesh D Damania

Founder - Wealthcare Investments

EduPrenuer, TV show panellist and Blogger

You can reach him at 9833778887 and wealthcarein@gmail.com

"Risk comes until you know what, where and why you are Investing"

Action Bias

In the series of 21 behavioral biases we will discuss the 17^th bias “Action Bias”

It’s been said that we must be in action, always!! We are descendants of the quick respondents. Lightning fast reactions meant to be survival. If you see fire around, you will run in opposite direction, no matter how safe you were from that site.

“One should always be in Action” Well that’s right. But with a rider! Action- where, when and how? That’s million dollar question.

Our actions are triggered by our impulsive emotions. That’s dangerous. Mindful actions are more rationale and fruitful.

 Few examples:

1)      We just saw online sale by the biggest online marketers in last 30 days. People were in action to find deals and buy them. While few bought products they really wanted but many indulged in buying due the hype, Advt/promotions and discounts! Online marketers made you ACT impulsively with captions such as – Last hour, only few left, XXXX numbers of orders in last 1 hour etc.

2)      How we react to small incident at home or office and later regret of that action.

3)      How we react and do what the crowd is doing, without knowing about it at all. We just copy the crowd.

We prefer action over inaction. Many times inaction is boon. Current world is different, it rewards reflection rather than (re)action.

Investors too make the same mistake out of Impulse and herd mentality.

Since decades, this has been the truth!! Investor take many decisions out of impulse action bias and end up selling or buying a stock/MF or any other assets.

Few recent cases that I encountered are:

1)      Seeing good profit in portfolio currently. Should we sell it?

2)      A scheme is not doing well. Why don’t we exit and invest somewhere else?

3)      Let’s exit current portfolio and move to Index funds or schemes doing good in recent past.

4)      Market is about to fall, let’s sell everything and re-enter at fall.

5)      I will wait till market falls. It’s too expensive.

These are all classic cases of Action Bias.

How does the Investor know about all this? Social media does the work besides the punters of market. Generic message (at times from unverified source) are taken more seriously than anything else.

Action bias is very common for the Investors and (many) advisors too!! Many times Advisors end up promoting the best performing fund by redeeming poor performing fund. End result, it ends up into never ending trap of chasing returns😊

At Wealthcare Investments, we evaluate performance of existing funds and look for opportunity in newer products/themes. So when we decide to re-shuffle the Investment, we test our hypothesis before we go to Investors. We put enough efforts in understanding why we are redeeming a fund and buying another fund. We do it on both assets, but more on tactical assets.

Little scientific approach in investing can give us great experience.

What should you do as Investor?

1)      Assess whether frequent action leads to more pain or gain?

2)      Check the charges, taxation and time loss before you act.

3)      Examine reaction of your action on your portfolio.

4)      Ask yourself, if it’s done by someone, should you also do it?

5)      Frequent action leads to erosion of returns than otherwise.

6)      Consult your advisor before jumping guns. He is required to have your issues addressed.

MF Trivia: Because Investors are impatient, Investment returns and investors return are different. Choose equity MF for long term and stay committed to the asset class. Change scheme but not asset class.

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

Author –

Bhavesh D Damania

Founder - Wealthcare Investments

EduPrenuer, TV show panelist and Blogger

You can reach him at 9833778887 and wealthcarein@gmail.com

"Risk comes until you know what, where and why you are Investing"

Information Bias

In the series of 21 behavioural biases we will discuss the 16^th bias “Information Bias”

We are living in world of information & Technology!! Cutting edge technology is been able to dish out information real time. Below are some statistics taken from Internet.

1)      Total world population is roughly 7.7 Billion of which 26% are below age of 15 yrs and 9% above 65. Currently there are 4.33 Billion i.e. 56% active Internet users in the world. India is among top 3 countries of Internet users.

2)      500 Million Tweets per day

3)      95 million photos are uploaded on Instagram daily

Can you imagine how staggering these numbers are!! Growth of internet use is going to grow rapidly in times to come. Extrapolate the amount of information overload we are expected to experience😢.

Earlier Information was conceived to be boon in decision making but not anymore. Our decision making is becoming ineffective with information overdose. We often confuse information with Knowledge.

Information is good only when it’s required and also from reliable and trust worthy source.

Would you like information about a product or services which you are not considering at all? Certainly NO. But still if that hits you again and again, you will, sub consciously, start to form an opinion about it!!

Information factories are manufacturing bad and useless information more than genuine/ true information. Needless to mention about hoax msg of death, natural disasters, beliefs and announcements etc that keep doing rounds on social media. In financial world too there are many hoax and scary msgs/ articles keep surfacing from time to time. That keeps investors in jitter.

In investing, our mind attracts sensational and contradicting information more than relevant.

Media houses are thriving on the same. They are not wrong at all. 90% + trade in exchanges are from traders and rest are from Investors. How good will it be for media house to not serve the 90% plus audience??

Investors are consuming news made for traders😉  Investors and Traders are different mind sets and thought process. You can’t consume their food, as investor.

As an investor, you must watch the personal finance shows rather than daily morning market shows.

Investors tend to become pundit with these news and override the advisor’s recommendation. If you have faith in your advisor, you must discuss your concerns with him and follow advisor!! Investor overriding advisor shows low confidence in relationship. Now a days Doctors are avoiding patients who are Google- educated as they find such patient are firm in their mind about their illness and prescription of medicine. Doctors feel helpless

When you tend to believe you are more aware and informed about Investing, you are victim of Information Bias. Not saying advisor will get his investment calls right every time, but his hit rate is likely to be more than your’s.

I too receive diverse views from variety of AMCs (Asset Management Companies) about their market views and product positioning. All diverse views will have their own valid rationale. After all they are paid for promoting their own company!! I have frizzed upon the AMCs I would like to work with and products I would like to distribute. We believe in dialog with the fund management team, their thought process, product attributes and consistency of performance. Among others, these are the check points we follow before we take AMC or product to our clients. This has given us good results since 10 yrs of existence of Wealthcare Investments.

What should you as Investor

1)      Do not pay attention to news and stories which can have impact on short term because you are long term investor. It will hardly matter to you in long run.

2)      Follow 1-2 expert (only) you like. Examine his/her past forecasts carefully before you select an expert.

3)      Recognise that information is not equal to Knowledge. Information may be true but the interpretation is perspective of the author.

4)      Find out facts from information and apply the fact on some models to conclude investing decision. Fact will have to be examined in conjunction with other factors at the same time.

5)      Have wise advisor and discuss various concerns you may have from time to time.

6)      Never think to outsmart the market. That’s job of traders. You are Investor!

7)      Social media is great platform for quick publicity. Be wary of such author/writer/promoters.

8)      In Investing less information is more knowledge. Less is more.

MF Trivia: Sterling long term wealth is created by Equity markets. Most of the Mutual funds have outperformed benchmark returns also. Chose equity as long term asset class and not as quick money making machine in short term.

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"

Status Quo Bias

In the series of 21 behavioural biases we will discuss the 15^th bias “Status Quo Bias”

Status Quo Bias is also known as default effect. Law of Inertia is at work.

We find comfort in everything “as it is” in other words we like to keep things (at home or work) at same place as we find them convenient to access. Convenience is key driver of this bias!! Are you taking the same route every day? Are you using the same product regularly? Aren’t you using same method of working daily? If the answer to such questions are yes than you have Status Quo Bias. 

Law of Inertia deters you to try new things/route/methods etc.

While many habits are good to have but few are dangerous for personal development and growth. Modern economics has powerful quote “Change is the only constant thing” Recall how many have lost their jobs and career when computer were introduced in India and they kept resisting change. What’s happening to our Kaali Peeli Taxis and Rickshwas with Uber and Ola? Online travel, Books, Food delivery and many time and labour saving devices are few of many examples which made people with status quo bias, fully redundant.

How many of you have bought latest Microwave oven and explored various recipes? 90% use it to just warm food or make Pizzas. Come on you didn’t buy expensive Microwave for just warming food😊😊 . Same is true for Mobile phones too. We buy latest device for its features and don’t use it ultimately.

Millennia are quite sharp and adaptive to change so most likely they will retain their Jobs and careers. Millennial try new things, new places and products. They are also more focused and target oriented hence they will have to be agile too.

Status Quo bias has significant impact on the Investment habits also. Like many prefer assured return products over market linked products, many prefer state owned LIC over other Insurance companies and “Property as safe asset class”. I know people whose wealth is distributed among Fixed return products and properties only. They preferred status quo of what parents/others did. End result- lack of liquidity, diversification and poor portfolio returns. They are still married to that Investment pattern and will continue to suffer over longer period of time.😢 Even in equity investing, few would prefer large cap or a particular sector only. They are also stuck with their prejudice.

I would also like to talk about the high interest paying corporate FDs, private debt placements and chit funds today.

There are investors who prefer to invest in corporate FDs, lending to private parties and chit funds. Word FD and higher interest rates drives their behaviour and decision. One must understand that few % extra return can be harmful to your capital itself. If you have 10 lakh to investments and you chose one of these, for extra 1-3% returns i.e 10000-30000 extra money you have put entire 10 lakh to risk. Than blaming Govt, RBI or SEBI helps little. Imagine the trauma and stress that you may undergo. I am strong believer of no dealing with small co-operative Banks also. Less is more in such cases✔.

Investor must move from perceived safety to perceived risky👍!! Ultra HNIs have their portfolio being well balanced into Real estate, Debts (not FDs) and equities (shares and MFs). Probably that’s the reason why they are where they are and have created wealth for generations to come.

Typical asset allocation of the Investors with wealth in the range of 5-10 crore would look like this- approx. 80-90% would be in property, assured return instruments (including PPF, PF, gratuity, Insurance etc) gold and maximum 20% would be in Equities. The equity allocation has scope to go up to 30-35%. The equity allocation is capable of generating extra return which is capable of beating Inflation and life style expns. One must sit with financial advisor to select percentage allocation into various asset classes.

Advantage of diversification are many. Few listed below:

1)      Liquidity

2)      Tax efficiency

3)      Mitigation of risk

4)      Optimization of return

5)      Quick and easy opportunity of leveraging

6)      Helps in building all weather portfolio

As an Investor one must challenge status quo and consider the benefits stated above and explore diversification in Investment. Start with simple Mutual fund investing instead of AIFs, PMS or Art etc.

MF Trivia: Do you keep money in Bank a/c or short term FDs for 1 week to 6 months?? Why don’t you explore liquid fund or Arbitrage funds for better Tax adjusted returns with any day liquidity? Speak to me on how to optimize the returns.

Greetings of Labh Panchami to you and your family

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"