What happens when you see a news item like this in the morning paper:

“Doctor rapes Patient” in …..

or “Chartered accountant cheats old lady” or

“Bank manager swindles money from a senior citizen”

You get the drift, right?

Well, the press has the ability to make or break our likes and dislikes. We suddenly think that all doctors are bad, all chartered accountants are cheats and all bank managers are frauds.

The reality is that every profession has its black sheep – and they are a drop in the ocean. Surely this headline is not representative of a doctor, CA or a bank manager, right? I know at least 100 doctors, maybe 500 CAs, and tons of bank managers.

What do we do then?

We have a discussion about these 3 professions and say “none of the doctors that I know are capable of doing this….but look generally doctors morals seem to have gone down”.

Do you understand what we are doing?

We are drawing a full, major conclusion on a whole class of people based on one single incident WHILE COMPLETELY IGNORING all the other evidence (of people we know). This in ‘LOGIC’ is fraud.

Now replace doctors with ‘Hindu’ or ‘Godman’ or ‘Muslim’ – do you get what I mean? we draw inference from a very very small sample IGNORING evidence to the contrary.

Why does this happen? It happens because of a bias called ‘recency bias’ – we think the latest information is far more important than the many years of data processing that we have done (In my case almost 57 years).

Now come to financial news. You have been told over so many years that equities give you good returns. Maybe 20% pa or 25% p.a. However you have not been told about the standard deviation. Go and check your statements – the equity return in the past 3 years (even 5 years) is a pathetically small single digit number. Yes. Go and check your statement. However that does not mean a thing. It just means that when I say that equity is a 10 year product don’t just chuckle. It is a 10 year product. Not a 8 year or a 7 year product. It is a patience game. You need to give it 10 years to make money. You need diversification – it helps to have some US $ denominated assets. It makes sense to have some investments across Europe. Or Asia beyond India.

Yes Equities are risky. Make no mistake. To reduce the risk we invest in a portfolio. I like Nbfc and banks – they are profitable. However every Nbfc and bank is like a Hedge fund – 20% is own money, 80% is leverage. So a small tilt can take the ship down. So the quality of assets and q of the promoter have to be awesome.

I like it when I invest in a good Nbfc and a good bank. No I am not willing to name them once more – it is your call.

When I hear that one Nbfc has got into financial trouble, should I get worried and dump Hdfc Ltd. and Cholamandalam? Or should I go and add Dhfl, Equitas, Chola, Hdfc Ltd……to my portfolio? Obviously at current prices?

Hey its your call. YOU chose to read the news paper, not me.

I do not read the noise paper. It never helps.

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  1. Subra sir, “It is a 10 year product”: Suppose a person invests 100 Rs each year (1st of every January of the year) from 2008 to 2018 for 10 years. 100,100,100,100… etc. The actual returns from sensex/nifty are as follows: -60%, 88%, 15%, -30%, 3%, 38%, 1%, 4%, 36%, -4% (as of today). Then Max return was on 100Rs invested in 2013 = 14% and minimum was on 100Rs invested in 2008=2%. But, since it is a SIP, if we sum all the investments of 100Rs where they stood as of today, Collective returns is just 8%. More-or-less same as a Debt instrument. If the investment was made in lumpsum, the returns vary. But in that case, we don’t know which year to put in the lumpsum. Any thoughts on this?

  2. Great question by SS, I have been pondering on this aspect but totally confused.

    If the equity returns are like debt/FD and volatility like a circus ride
    Is it not prudent to time the equity investments when the PE goes to green levels and remaining time to sit tight on FD/liquid fund.

  3. @SS , you should repeat repeat your analysis for periods starting 1995-2005 to 2007-2017 and see how it changes numbers . What you are doing is on point in time. Benefiting from hindsight Jan 2008 was almost a market peak , and 2018 us not a great year for equities

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