Neglect of Probability
In the series of 21 behavioural biases we will discuss the 18th
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 2nd option. However, rationally, you should
have assessed, what are the chances of winning in 2nd 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.
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comment
Author –
Bhavesh D
Damania
Founder - Wealthcare
Investments
EduPrenuer,
TV show panellist and Blogger
"Risk comes until you know what, where and why you are
Investing"
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