If you are investing to make money, an index fund is good enough. In case you believe that 2-3 well managed funds are better than an index fund, take that path.

There is, absolutely no reason why you should take the direct equity route. To me the direct equity route will die in about 20 years time – by which time I would be dead (hopefully) or senile. However till then I will be in direct equity – and today’s topic is ‘How to counter the confirmatory bias’.

Inside our head is a man who has a very important role to play in our life. He has to convert all the insults hurled at us as compliments and keep on making us feel good. Hence the word ‘nostalgia’ – it allows us to forget all the bad things and talk about ‘good old days’.

What does this have to do with investing? This little idiot sitting in our head cannot see ANYTHING that our brain does not want him to see. So when the US $ is 68 it can see 70. It cannot see 35 or 120. That requires a lot of hard work. When oil goes down we even use the wrong English – we say ‘oil is going down’ as if it is some present continuous. Honestly what we can say is ‘oil went down till say 35 $ to the barrel’ – we have no clue what it will do tomorrow. Or this very minute what it is doing in some part of the world.

So when I see Indigo – I see the efficient operations (Jet, KF, Spice Jet – all of them had it, right?), i can see the sensible aircraft purchase policy, i can see the smart Pilot school initiative, I can see the 24% year on year growth for 3 years at least. I can CONFIDENTLY see the 3 year growth in EPS ensuring the growth of the share price.

What I cannot see is the huge amount of debt, the potential oil price hike, impact of one crash, the international operations not taking off in a big way. The chances of interest rates going UP and destroying the advantage of being a little stingy in having a higher Own capital. The little fella cannot see anything wrong with the buy which his boss DECIDES not to see.

As soon as we go wrong – we know exactly why we went wrong – and how we can be correct tomorrow. Watch television and you will see guys with so much self confidence. This self confidence comes from the rationalizing – imagine an ANALyst will die every time he admits a mistake!! So what is the solution?

Run a parallel ideal portfolio and compare it to say an Icici pru Value discovery fund or a Prima plus. Now look at your portfolio. Be brave – show it to a s.o.b friend of yours whose one single aim in life is to make you look like an idiot. Let him thrash you.

When you are in a crowd take a dramatically wrong position in life. Say controversial things and find out how people react. Like me taking a view ‘Warren Buffett is right. This time is NOT different. An airline company CANNOT EARN money on a consistent basis over long periods of time, so the shareholder cannot (repeat cannot) earn money. Then worry about the debt, slowing economy, competition from other airlines, etc. This should make my view stronger – for or against.

Fighting biases is not easy. I am just trying to simplify things as much as possible FOR MYSELF. If you benefit, lucky guy!!

 

 

Related Articles:

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

  1. Well said Subra, well said.

    Although I don’t think direct equity investing will die. It’s like saying everyone will have a job. Well someone has to go out and venture.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>