Behavioral Bias: The curse of knowledge

When you are too close to a company or its promoters, it becomes difficult to judge. Or when you have too much knowledge about a business, you can keep wondering ‘why is this share going up so much’ – even when you realize that you are missing the opportunity.

In 2007 I lost a chance all my Tata Power and LnT shares – I sold of course – but not everything.

When a few IT companies and a few Finance companies came with an IPO – I was wondering what new are they going to do – and did not participate in their ‘success’. Insiders, it turns out, are often burdened by the curse of knowing too much.

Ditto life insurance. I am still wondering how an industry which has products that the world does not need have such a huge market capitalization. Two companies that are available for valuation by listing, are terribly over priced – according to me..so I will watch them soar, but will not participate. I know a doctor who wonders why drugs are priced so high – and I told him, blame the doctors!!

So when you know TOO MUCH you keep analyzing, and over analyzing. When the auto boom started in India fund managers abroad took a big stake in the boom. They saw the potential of investing in India where the cost of labor was so low. We missed it. So the FIIs have a 26% stake in Indian top companies – dramatically up from 12% about 10 years ago.¬†Classically insiders with expert knowledge are supposed to have an edge on naive outsiders – so we the Indian fund managers should have known better than the analysts abroad or the fund managers abroad! However, the curse of knowledge works against us. We cannot un-know information, we’re unable to put ourselves in a state of un-knowing or not knowing what we know / knew.

We keep forgetting that a poorly managed  company may have some assets Рlike land. So even if you did not like Larsen and Tubro -you will have to hold on to that share till some of the land parcels are converted to cash / rental income. When you see the management too closely, you miss the 800 lb. Gurreilla walking right across your room. Familiarity bias?

 

 

 

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