In life we are all generally confused about what we want. We want too many things from life. We want the Job Security of a Central Government job, the salary of Citibank, spend time with kids, vacations in Europe and USA regularly, a big house, a big car, financial freedom, ….I am sure you have noticed the inconsistencies by now.
Similarly while investing, we want the returns of a Warren Buffett, the trading skills of a George Soros, great investment returns, consistently BEAT all our friends while investing, the latest investment tips, the glow of an ethical investor, the profits of the sin industry, ..and so on. We want to get rich, banish the fear of ‘what if all this becomes zero’. We want good advice from financial advisers, blogs, television, magazines, etc. We want financial markets to be fair when we are losing money, but give us dramatically higher return for the ‘risk’ we took by investing in an IPO! We keep on searching for an edge that would let us win, sometimes fair and many times ‘fair’ as rationalised. We want to leave a fortune for our children and keep telling them “you have to work hard to earn a living” . WE do not like paying taxes, so we will find all rules to break. We will then say professionals, businessmen and politicians pay no taxes. The sum of our wants and behaviour make markets go up or down as we herd together or go our separate ways, most times inflating bubbles, sticking to our idiosyncracies, reading about behavioral finance, and not understanding OUR own behavior!
We want to create wealth by HOARDING a commodity – could be even Real Estate without realising that a ‘commodity’ by definition cannot create wealth. RE creates wealth for the manufacturer, trader and financier – not for the user! So we will see the profits made by builders, by housing finance companies (at present there are about 90 of them) and banks. We see the life style of builders and brokers, but we will want to hear anecdotal stories about “how my grandfather bought this house for Rs. 20,000 and is now worth Rs. 3 crores’ – even here we will use emotion, NOT EXCEL! Whenever this inconsistency in our attitudes, views, ideas or opinions kicks in our response is to TRY TO eliminate that dissonance. Cognitive dissonance – I have written about it earlier too goes together with confirmation bias. We believe that the ROI on education is infinite, so if I spend Rs. 2 crores on our children’s medical education, the kids will end up very very RICH. We seek only those opinions that agree with our own line of thinking.
Now imagine my job – trying to tell people that expensive medical education – WILL NOT MAKE YOUR CHILDREN RICH.
You can own a house if you want, but mathematically RENTING is superior to BUYING.
So how can you identify these biases while investing:
- Understand the role of luck in your life
- Gratitude for getting the right asset allocation – and generally in life
- Having enough ENEMIES on social media who will rip you apart
- Having sensible friends who will have a dramatically opposite view on most matters
- Hearing all types of fund managers – include the corrupt ones who made more personal money than the fund NAV
- Selling ideas which you hate
- Reading commie literature of how markets are cruel and are about to fail
- Putting yourself in other’s shoes
- Playing a few sports
- Challenging status quo in fields where you have NOTHING at stake
It is not easy. I do not see ANY REASON to have foreign shares in my portfolio – home country bias, but I do realize that after a particular level – say US $ 1 million, it does make some sense to be invested in the US markets, Europe, other growing countries – or simply in a World Index fund.
Ha! to know what a man wants is tough, forget reading a woman’s mind!
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