Halo Effect
In the series of 21
behavioural biases we will discuss the 20th bias “Halo effect”
Halo effect simply means single or few aspect,
characteristic, trait or behaviour overshadows many others. One overpowers many
other factors.
Don’t we judge a person by a single personality trait like
smiling face, great physique, Social status, beauty or age etc. A person with
smiling face, pleasing personality, eloquent speaker, killer eyes, rick and
famous aren’t familiar phrases??
In investing also Halo effect works and has bad effects on
Investing experience and returns.
Famous example of Halo effect is Ambani brothers. Many
Investors had invested heavily in ADAG group as well, premise being he is also Ambani
feud and is trained under same leadership of Late Dhirubhai Ambani. Mukesh
multiplied his empire and Anil Ambani reduced to Insolvency. I am sure
investors who lost fortunes in ADAG group will feel this in heart.
To make my point clearer, let’s see few more examples
1)
Till 2007-08, real estate companies were
enjoying great valuations and you know what happened after that. Land Bank was
key word during this time.
2)
During same period, Telecom companies were doing
extremely well. ARPU (average revenue per customer) was the key word.
3)
Early 2000, dotcom or IT companies enjoyed
higher valuations. Growth was key word.
4)
Till recently Housing finance companies and few
NBFCs also had dream run. NIM (net Interest margins) and loan book growth were
key words.
In each of these sectors, one key word (aspect) took the valuation
to obnoxious levels and then it crashed to never recover in immediate future.
Many companies have even disappeared or reduced to a penny stock😢. Halo Effect played on Investor’s mind.
Our mind has short term memory and recent instances gets
extrapolated or manifests in our thinking.
If the prices of sector/stocks have crashed, we tend to feel
it will feel it will crash further. If a sector/stock is doing good, we feel it’s
likely to continue for infinity😊.
Halo effects makes you irrational thinker and poor investor.
PSU, Pharma, Infrastructure and Telecom service as sector
are expected to do well in times to come. These sectors were laggards for long
time. If you disregard these sectors, you will most likely miss great upside.
Similarly, Small and Midcap segment were overvalued till FY 17-18 ( you know we
exited all of that in same period) and looks promising in times to come (you
are aware that we started building positions in the same since early 2019)!!
Few stocks have rallied meaningfully since 2 yrs and are
still going strong!! I believe they have entered the uncomfortable valuation
zone and most likely to deliver subpar returns once the market witnesses broad
based rally. If you buying these expensive stocks now, you are victim of Halo
effect😊
In advisory too Halo effect works. Lot of investors believe
that large Institutions are well researched and offer best advise due to their
size and reach. Well, that’s true but the biggest issue with these institutions
is the alignment of interest. Many a
times they are serving their own/organisation’s interest rather than Investor’s.
Content is not a problem but the real problem is of intent🤐.
What should you do as an Investor?
1)
As in life, remember that nothing is permanent
in Investing too.
2)
If stock/sector or MF scheme is doing good now,
it’s not guaranteed to do well in future also. And vice versa.
3)
Judging merely by latest performance and
investing is not wise way of investing.
4)
Examine factors which are likely to affect your
investment decision. These factors can be negative or positive. If negative
impact expected, book profits or exit. If positive impact expected, add more or
start investing. Don’t just judge investment by its price.
5)
Don’t be victim of Halo effect of “large
institution/ Banks do good advisory and are aligning their interest with your
interest”. You know thousands of examples of mis-selling by these
outfits.
MF Trivia: Averse to risk of Markets but still wish to
invest with safety guards? Consider Asset allocation funds. There are asset allocation
funds with debt tilt and equity tilt. Ask us to find out what is more suitable
for you.
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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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