I never sit in a traffic jam and ask “who caused the jam”? I clearly know that I am the Jam! Similarly I hate telling people that “Investors herd”. Of course they do. I am just observing, not commenting on this. Herding is neither good nor bad. Herding is neither good nor bad, it is a fact.

Now if you were a zebra in a herd of 50,000 in Africa, should you herd or not herd? Of course you will herd. If you are at the edge of the herd, you will get the juiciest grass, but you will also have to be alert to lion attack. If you are in the middle of the herd, you will get grass trampled by others, but there is not much danger of a lion attack. So herding has its advantages and disadvantages. It is always at the periphery that the danger lies – and the juicy grass.

Let me tell you how  I used Behavioral finance. One of the biggest problems in the market is what I call “slow updation of beliefs”. So about 8 months ago I think it was public information that Nippon was to take over Reliance Nippon Asset Mgt company. This was not some secret, but all of us had read this in the papers. The share was at about 180 and this information was public. It was clear to me that the following would happen:

they would attract more talent

maybe the people who left them would come back (low hanging fruit for the amc)

they would attract more money

Seriously in the money management business, you do not need anything else. The fund management team and the ops was in place anyway. So scaling up was not going to be an issue.

Whenever and wherever I travelled I would do a small experiment. I would ask the IFA (remember he is an opinion maker for many investors). In 100% of the cases I would get a reply “arre sir this is an AA company…and is not worth investing”. I was not so sure whether they would be doing business with Rnam, but they would just not invest in the equity of an AA company.

SLOW UPDATION OF BELIEFS – is something which forces you not to even LOOK at the facts.

CONFIRMATION BIAS screws it up even further. ‘See Subra they lost 9000 crores” – which meant that they were correct, they were getting information that Rnam was doing badly.

These are 2 big behavioral finance issues, and I was staring at them..while calling up my broker (oops I am old, and old fashioned). Saying “looked good at 120, I missed it, but at 180 I think it is a steal, BECAUSE people are behaving EXACTLY like the book says. At least 2 CEO of MF asked me and I said “I am expecting great things from PGIM and Nippon”. Clear that change in shareholding would drive the same management team very differently.

Makes it easy to herd, but being at the edge of the herd gives you juicy grass. Here I was seeing 3 biases at work –

a) Herding:

b)Confirmation bias

c) Slow updation of belief

So one is to read about Behavioral finance, one is to see it at work, and the best of course is to benefit by Behavioral finance.

Thank you Thaler.

I WAS also fighting another bias in my own head. Except for a few people – whose view on equity pricing mattered to me – not too many people thought it was a good buy. Every other person was telling me that I was wrong. This meant I was not getting ‘Social approval’ for my buying. I was asking myself “You idiot, if it was so simple why are Vallabh and Rakesh not buying everything”. Well I have no clue whether (and how much) they bought, but the quantities were not showing on the screen. I was also telling myself “whatever FINANCIAL problems exist, Nippon has enough cash to handle” and I was also telling myself “I do not expect to see some cockroach in the sink” – remember a cockroach is rarely alone!!!

Of course the risk was that Nippon could pull out of the deal – I had to take that risk.

If Nippon had pulled out (for whatever reasons) I would have lost money, but I would have still got a story!! Like many other stories of my investing life.

Funny 2 listed amc are hitting all time highs, and one holding company of an amc is hitting all time lows. What about them can’t I see and the market can see?