Whatever decision you take in life, there can be a regret. If you choose to take full insurance for your car, and nothing happened and you made no claim, you regret taking the full insurance. ON the other hand if you do not take full insurance and you have an accident, you can regret that too. Ditto medical insurance. In case of life insurance, you may not be alive to regret. Her is a para from a book that I’m reading…

Before he decided to start Amazon.com, Jeff Bezos had a well-paid position at the investment company D. E. Shaw & Co. in New York. Starting an online bookstore was going to be a big leap—Says Bezos:

“The framework I found, which made the decision incredibly easy, was what I called—which only a nerd would call—a “regret minimization framework.” So I wanted to project myself forward to age 80 and say, “Okay, now I’m looking back on my life. I want to have minimized the number of regrets I have.” I knew that when I was 80 I was not going to regret having tried this. I was not going to regret trying to participate in this thing called the Internet that I thought was going to be a really big deal. I knew that if I failed I wouldn’t regret that, but I knew the one thing I might regret is not ever having tried. I knew that that would haunt me every day, and so, when I thought about it that way it was an incredibly easy decision.”

Now look at your financial life. Your portfolio gives you a ‘financial security’ – well it is on paper for sure. I have a share called Cholamandalam Investment and Finance. Having traded in it many times my cost has been beaten down to zero, so technically I should have no regret if the price goes down to zero. I am assuming that cannot happen, so the regret is difficult to quantify if I hold it till the markets crash. Let us say I have 100 shares. If the price goes up from 1385, I should be happy. ‘

Well, I can regret that I did not buy more of it. After all I did have more than Rs. 1.5L lying in the savings bank account.

If the price goes DOWN to Rs. 1000, my regret can be that ‘If i had sold it at 1385, I could have bought it back at Rs. 1000.

If I had sold it at 1385, and bought it back at Rs. 1000, and the price falls to Rs. 900, I could regret that I bought it too early.

If I had sold it at 1385, and it went down to Rs. 1000 and I bought it back only at 1100, I could regret waiting too long.

When I bought warrants of Hdfc Ltd about 18 months ago I asked myself this question: “If the markets were to go down (or financials were to crumble) and I lost money on the warrants (leverage kills), would I regret it, would it wipe me out, would it scar me, and is it a decision which I would still make again?

I decided that I liked the group (sheer 38 years of holding), I liked the business model (still), and I am anyway holding the shares – well almost till I die. So I went and bought the warrants. The size restricted me from buying too many options, but here I was.

Then the warrant prices went up, and I had to decide. So a 50% annual return (tax free) was too much to give up. There they got sold. Original shares still remained, but the warrants got sold. One needs to take some money home in a frothing asset class, right?

Again I asked myself this question; “I am using this as a RISK REDUCTION TOOL – reducing my exposure to financial services. I have already restricted myself to about 5/6 companies (as always) in financial services – do I need to, and should I worry too much?”.

I then wondered if I will regret if the market crashed. I would.

I would have hated myself for not even using risk reduction techniques. So I sold, and will have no regrets when the warrant prices go up. No, not that I have controlled my greed (my original shareholding of Hdfc stays on) but because I wanted to reduce risk in my portfolio – and MINIMIZE REGRET later on.

In investing you will realize that good decisions can have bad outcomes. Or what looks like a good decision can have a bad outcome because you missed some obviously simple facts. That is to be expected. Some poor decision – more out of laziness perhaps – can have great outcomes. That is pure, dumb, bloody luck. Yes, we will live with both, but Regret minimization is a nice thing to learn from amazon.com – and ha, that is free. Free delivery, no packing charges, no taxes.

Makes sense?

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  1. Regarding the comment about doing a SIP in a “good” equity MF – how I wish it were true. A significant length of market action or inaction as in a sideways, raging bull or a roaring bear market will unsettle most “SIP investors”. Until then, a SIP will seem like good financial medicine.

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