A couple of days ago somebody had posted “if you know that the market is going to go down..what is the harm in selling some shares and then buying it back”. Good question, and almost a rhetoric in terms of rewording: “if you know that the market is going to go down…YOU MUST SELL SOME SHARES AND THEN BUY IT BACK”.

Brings us to 2 words – obvious and inevitable. Jason Zewig is perhaps the only author who makes this distinction. The question of course is the clearest manifestation of ‘Hindsight bias’ – about which I could write a separate blog post. In fact Princeton University psychologist Daniel Kahneman says, “Hindsight bias makes surprise vanish”. 

When NaMo demonetized, it took us all by surprise – those who had cash, it took them by shock! However, once the news sank in, how brilliantly we said ‘Oh it was inevitable’ …he a) opened jandhan accounts b) had an income declaration scheme..and now demonetization…HOW INEVITABLE and OBVIOUS that this would be the next step. Right? well no so. He could have arrested a few bureaucrats, jailed a few politicians, introduced a new 500 Rupee note, a new Rs. 2000 note…and then suddenly demonetized the old 500 and 1000. We would have AGAIN SAID…obviously he wanted to demonetize THEREFORE he introduced the new notes.

The truth is WE WERE ALL HIT by the surprise of demonetization. We used Hindsight bias and removed the surprise 🙂 .

We have all done it in the past. So FIRST, stop fooling your brain that you KNOW what is going to happen in the future. We do not know that we do not know – that is the problem.

So what happened to me in 2007. I saw the market going crazy – now what helped me was reading a couple of books on Behavioral finance and Ken Fisher’s – Only 3 questions to ask!

So when I isolated my portfolio, I realized that 2003 to 2007 was NOT REALLY AN ALL ROUND bull market. The FMCG, IT, etc. did not participate in the rally. I found that Tata Power, LnT, Cholamandalam, Kotak – had all gone up far above my comfort level of holding the share. I sold. And then these shares fell by a long margin.

LESSON #1: I did not sell the market. I sold specific shares whose value was too much according to me. 

I never thought that my portfolio would go to zero – what should I do kinda fear. I knew that my limit to a transaction would be Rs. 0.5 milllion so I THOUGHT that a world will not come crashing down if I were to lose that kinda money.

LESSON #2: I realized that a fall could be a great time to acquire shares.

I have used this very too often – and I am not sure whether it is right. Brought up on the ‘Bull market theory’ – that stock prices will always go up and reversion to the mean, whenever there is a general fall in the market, some shares are always worth buying. So when Donald Trump got in, and the US $ got stronger, I bought the technology pack and the pharma pack. ‘Markets’ go up or down – it does not matter, there is always a buying / selling possibility in YOUR PORTFOLIO.

Lesson #3: I always take small steps

Let us say I have 40,000 shares of a company, my experimental trade will always be 500/1000 shares. There is no point in not testing your hypothesis. For example I thought Cholamandalam was getting expensive at 1000. So I sold at various prices including 1225. When it went up Rs. 50, I sold some more from 1050 onwards. This allows you to buy when it is down. I bought yesterday at 876. Which means once you sell – you need the conviction to sell MORE as the price goes up, and BUY more as the price comes down. Unlike John Templeton who said ‘buy at the lowest point of maximum pessimissm’ I believe i will keep buying on the way DOWN and keep selling on the way up. I do think going up or going down is a function..and a curve – not a point.

Lesson #4: Question the Consensus:

When the demonetisation happened people said ‘now there will be no black money’ or ‘we will go cashless’ – to me these are extreme positions, that  I will NEVER take. The truth is the number of people going cashless will increase. Perhaps dramatically increase, but we will never become cashless, nor will the black money disappear. So when there is consensus about anything – it is your duty to question it very very hard. Whatever happens to whichever part of the world company, the Nestle, Cummins, Asian Paints, Hdfc bank, ..continue to rock. So like Nestle making a comeback after the Maggi episode, Asian Paints had to come back after the demonetisation episode. Did not require a PhD to guess that. Or that the resignation of Chitra WILL put  a shadow on some of the brokers who participated in the HFT – and that would be another opportunity to buy. Similarly if all the pundits are sure that interest rates will ONLY COME DOWN, Urjit Patel can show off his backbone!! Do question the consensus – it is lovely to see pandits fall.

 

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  1. Here’s a foresight event: Long term capital gains for Equity are going back up to 3 years. It will still be zero percent as long as STT is paid, just the period will be 3 years. Zero hindsight bias required!!!
    Sunny days ahead for Mutual funds!

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