There are many lies that we tell ourselves and our spouses (I have checked our investments, they are doing well). Some of them we know are lies and some of them are so ingrained that we do not know them as lies. So if you are a debt investor, you have some clue on what returns you are getting. However if you have an equity portfolio (dhobi list) chances are you have no clue what is happening to your equity portfolio. Clearly no clue. Let me enumerate:

  1. We think we are Judges, actually we are advocates: when a nice looking investment idea with emotional pitch is made, we first sign up for the plan. After some time we realize that we were nicely done in by the story, not by the math. What happened? er…what hit us? Well, we rationalized. We are irrational, but tell ourselves that we are rational.
  2. We seek optimization of our assets. Wrong. Our asset allocation is a function of our irrationality, parents behavior, own attitude towards money, our greed, etc. In most cases we have a Dhobi List and not really a portfolio.
  3. The markets are efficient: Very difficult to prove this and almost impossible to say that this is wrong. The price gyrations that a single stock can take – or the whole market can take is stunning. Too many factors at play including resistance to change by big institutional investors, ability to bribe big investors to vote along with the incumbent management, sheer inertia of existing shareholders – see AM Naik of L&T being able to convince the Board that he is irreplaceable.
  4. Collectively we cannot, but I can: Many individual investors accept in private that there are some brilliant fund managers, but in the same breath claim that they can beat the market. To me this is one of the worst white lies that we tell ourselves. What gives us this overconfidence is worth doing research into.
  5. I understand RISK and VOLATILITY: Actually we do not. Both these concepts are related, and actually what should be worrying us (especially if we are retired) is a permanent loss of capital.
  6. Complex solutions are better than simple ones: I can make a very mathematical, statistics driven presentation or a simple presentation to say the SAME thing. Most of the audience actually want to be dazzled by all the pie diagrams, the Greeks, the charts, the correlation stuff EVEN If they do not understand. However a simple “these 3 funds suit you” -is frowned upon because they have not been given a choice…
  7. Fees does not matter: I know of a financial planner who says he is indifferent to where a client does his investments. Great. I saw a few of his clients pay him for his services and then use a platform like a bank – which is a huge double whammy for the client. Fees does matter – in fact it is the only thing that an investor can control.
  8. Market timing works for ME: this delusion does not go away at all. In public they agree that timing the market, the industry, the cycle, etc. is very difficult. However in the next breath this software engineer (banker, insurance salesman…all of them) are extremely confident that market timing works for them.
  9. I can create my own portfolio: Actually even assuming that a person can trade right in and out of the market, creating a portfolio is a herculean task. However, people pretend that they can do it.
  10. I know what returns I get: People who do not write down their portfolios or use good accounting software actually have no clue about their CAGR..but like car mileage people put on a brave front as  if it were a big macho thing! Even women do it – just bringing in the gender equality at least in case of idiotic things!!
  11. By copying the rich, I will be rich: this is the basis on which all ads are based. So we end up buying some of the things that the real rich use. We hope (and believe) that by copying the rich, people will perceive us as rich.
  12. I do not need help: I can plan my financial life, make my will, create my portfolio, do market timing, calculate returns, plan for retirement, etc.

When you catch yourself telling these lies to yourself, wake up and smell the coffee…..Good morning ## 

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  1. Nice and candid summary of what we all do or pretend to do. And this pretension is the biggest fallacy facing us.

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