Evaluating Stock Investing Performance

ICICI Direct has a very good tool for you to analyze how you perform with your stock investing.  While we constantly engage in the buys and sells, in our mind we over weigh our profits and ignore and try to forget our losses thereby making us overconfident on our abilities.  Having such a tool helps you to sit back and take notice of whether the activity you engage in is a fruitful one or you would have been better off if you invested in Fixed Deposit or give it to some professional money manager.  My goal is to make a decent return of over 15% per annum over long term. 

Untangling Skill and Luck - Michael Mauboussin

This is great presentation by Mike Mauboussin on  Skill and Luck.  He explains where luck and skill apply and how they work together.  Very interesting and informative video.  This touches a bit on the behavioral aspects of our mind as well.

Paid For The Wait

Image Courtesy of Stuart Miles / FreeDigitalPhotos.net

Today’s life is all about instant gratification.   Even though we all have heard about the saying ‘Patience is a virtue’ the world is moving towards instant gratification.  The product life cycles are getting shorter and shorter and all corporates wants to get to the D-Day in the shortest time possible to get the outcome they are waiting for.  For most of the folks in the current generation,  it is all about ‘what can I get and enjoy today’ which is very important.  No one is willing to wait for a long time to enjoy more benefits.  That is the reason we have all these FMCG companies exploiting this bias by introducing all instant XXX in their products ranging from instant Noodles to Coffee.  Life is moving fast and no one has time to even time to smell the roses, (forget about growing rose plants).

Does this kind of instant gratification work in investing?  Answer is a clear no.  Investing is all about patience and being a sloth.  Investing works best for people that are lazy and hate action.  

Image Courtesy Anekoho / FreeDigitalPhotos.net

 As Mr. Pascal said and I quote,  “All human evil comes from a single cause, man's inability to sit still in a room”.  We somehow associate action to being productive.  I do not want to get into the details but I can cite one example that I like the most.  There was a study which was conducted to analyze the penalty kicks by the shooter.  They found that it was equally disbursed by 1/3 towards middle, left and right.  So if you are a Goal Keeper, you have almost the same probability or chance of saving a goal just by standing in the middle and doing nothing.  But, you will be surprised to know that almost none of the goal keepers would stay in the middle but would either dive to the left or right despite knowing this probability.  Why would they do it?  Simple, they are influenced by action bias.  They are okay to have dived left or right and lose than to stand there and make other feel that they did nothing.  Most of the investment managers and investors feel the same.   They get fidgety when they are not actively engaged in stock market.

As I see it, the only profession that really pays you handsomely for doing nothing and being a sloth is investing.  You are almost paid for being lazy.  All you need to do is overcome the bias of doing something.  We go through lot of desperation in deploying cash or removing it in short times.   We may have a windfall or some profits we want to immediately invest in or we may want to quickly book profits on something that went up in a jiffy (even though we may do better holding it for long run). On the contrary, we want to exit from investments that have lagged or dragged your returns down in the short run of say past 1 year.

Investment is like gardening or parenting.  You cannot expect a seed to give you fruits or vegetable right from day one or you cannot expect your kids to be productive on day one.  They become productive over a period of time.   We need to approach investing like that.  All we need is to water or nurture them and understand them better and wait until they bloom.  In fact, we are paid to wait and we will be paid handsomely. 

If we find a golden goose and we have bought it, all we need to do is wait until it lays its next golden egg.  We should not try to cut open its belly to find all the gold (instant gratification) , neither should we try to sell the goose and try to buy a crow that is painted golden.  Be patient and always act only when there is a need to.

Behavioral Biases - eBook

This is a good reference for all behavioral biases in one place.  Balaji Ganesan has done a great job of compiling his learning.  This has been posted in Safal Niveshak which is a site that I often visit.

Click here to open the eBook

Investing is not for the weak hearted

Image courtesy of Nutdanai / FreeDigitalPhotos.net

This year has been an absolute nightmare for investors in general.  While the Sensex stocks which is just 30 stocks index has held its ground better, overall stock market has lost anywhere around 15% to 25% depending on the market cap.  For example, if you look at CNX Midcap index, it has lost about 18% as of date since the beginning of the year.  Bond investors were not safe either. Due to rupees free fall, RBI has taken some drastic measure on liquidity which made most the yields shoot up driving the bond prices down.  Even money market liquid funds reported negative returns in the last week.  Anyway, who said investing is easy?

While the stock index has been down 18% to 25%, some individual stocks have been down 50% or more in some cases.  A correction of this kind would make may investors lose sleep and that is the reason there is very minimal retain participation recently.  Why do majority of us cannot handle this while some of the investors like Warren Buffet or  Mohnish Pabrai can handle even 50% contraction with ease?  To understand this we need to get into biology a bit. 

Bonus and Splits – Slices of the Same Pizza

Picture Courtesy: Wikimedia Commons

I received a postal ballot to approve bonus shares for a company I hold.  Generally March quarter is the quarter when bonuses and splits are announced by companies to improve investor sentiment.  It is believed by most of the investing public that Bonus and Splits are like free checks that have been given to them by companies which enhance shareholder value.  In fact most of the companies report this (in their annual report) as if these are shareholder value enhancing.  Is this just a myth or is the value creation real?  To answer this, let us go through some basics.

Stock Does Not Know That You Own It

By Amcilrick (Own work)  via Wikimedia Commons

Most of us would have come across many instances during our investment career when the stocks we buy do not go up in price after we have bought it.  Ironically, in many cases it generally goes down after we buy.  In the reverse, the stock we sell is the one that goes high after we sell.  It has happened countless number of times in my investing career. I always wondered if it is the stock that is at fault or us.  I am sure you know the answer but I would like to explain it a bit.

When we buy a stock based on our own calculations, we know how much effort we put to discover this particular stock and also to analyze it after we discovered it before we decided to buy.  We know the pain that we took and whenever we take this pain, we feel that we should be rewarded.

The Sellers Dilemma

By Marcimarc at de.wikipedia  from Wikimedia Commons

There has been a long debate on which is the most toughest decision for an investor - Buying or Selling?  It is always said that investing is simple but not easy.  Actually investing is easier said than done because it looks simple just like the sixers that Gayle hits during IPL but it is not easy like the way he hits it. In any investing there is a buy, and there is  a sell action.  In between these two actions we hold.  If there is contest on which is the most difficult decision, buy or sell, I would always vote for sell.  I do not know about majority of the people but from what I have observed or read from many well known investors, it has always been very clear that while many investors have very clear criteria on what to buy, not many people have very clear sell guidelines.  To support our buy guidelines, there are lot criteria set forth by many investors.

Buy Stocks Like Groceries

Image Courtesy: The Consumerist

It is our natural tendency to avoid any losses and we all like prices to go up the moment we buy something.  We expect this to happen to any type of investment we make like Gold, Real Estate, and Stocks etc.  You can see this tendency every time the petrol prices are hiked by the oil companies.  If you filled up the petrol just the day before and then the price went up last night, we feel very happy that we filled it before the price went up.  While this provides short term happiness, very soon we would be filling up the gas at a higher price when it runs out.

Beware of some of your biases

Man is a rationalizing rather than a rational being.  In our day to day interaction we display lot of biases or psychological behaviors which are consistent and irrational.  The link below explains about 12 different cognitive biases that prevents us form being rational

Some Biases that prevent us from being rational

Psychology of Human Misjudgment - Charles Munger

Behavioral economics is a new field that is becoming popular now a days.  This has brought out lot of understanding on the way our mind works and thinks when it comes to handling finance.  This is one of the speech on Psychology of human misjudgment.given by Charles Munger and as usual..he rocks..