Investor behaviour

Good advice: "Buy right, sit tight" *

Investor behaviour: "Buy wrong, wait long"

*               (Courtesy: Motila Oswal AMC's YouTube advertisement)

                 http://www.youtube.com/watch?v=2rpp6iLD2sg&feature=youtu.be

Never? Always? What do these words mean, really?

English language has certain words that change the meaning when used in the financial markets. Take for example, two opposite words – “never” and “always”.

Over the years, one has come up with many experts and common men use these words while referring to the future. Let us look at some usages of these two words we often come up with:

·      This thing will always going to behave like this

·      Investors will never learn

·      India will always be full of opportunities or India will never be corruption-free

(The above are general statements used as examples. These are not the author’s views)

When you hear these (bulleted) statements, you start forming an impression. The mind starts to believe things in “black and white”. Psychologically, it is quite difficult to appreciate the grey areas for many.

However, real life is quite different. I can be confident about the past but not about the future. It is in this context that the meaning of the two words may be different from that in the English language.

Very often, we extrapolate the past events into the future. If something has never happened, we assume that it will never happen. If something has happened very often, we assume it has to be always like that.

It is important to remember the mutual fund tag line: “Past performance may or may not be sustained in future”.

Consider turning point events – or a unidirectional price movement. The recent example of Gold prices suggests that many had accepted that since gold prices had risen continuously for almost a decade, gold would never give negative returns. One has heard the same argument for real estate, too. One has heard the same argument for equity prices in the past – remember 1999-2000 and 2007-08. In fact, when the party is going on, the music is “never” supposed to stop. But, it stops, eventually. The date of the “eventuality” is not marked in our calendars.

My understanding of these two words is very simple:

·      When someone uses the word “never” referring to the future, it should be understood as a very low probability, higher than zero

·      When someone uses the word “always” referring to a future event, it should be understood as a very high probability, less than 100%

The above thinking keeps one’s mind balanced. One is able to absorb shocks better, when they occur. This ability to absorb shocks allows one to avoid acting in panic.

Happy investing. Happy thinking.

Petrol price hike - normal reaction

Petrol prices hiked by Rs. 7.50. The headlines looked scary. People reacted to the news in various ways. One of the ways was to fill up the tank before the prices actually went up. On the face of it, that looks like a sensible thing to do. However, once you do a quick calculation, you would realize the cost of filling up one final time before the hike.

In many places, people queued up in front of petrol pumps in the evening after returning from their respective offices. Long, serpentine queues were quite common. In certain places, people had to wait to a couple of hours before their turn at the pump.

Now, let us do quick Math. Assuming someone went with a mid-sized car with the tank (capacity: 40 liters) empty. At Rs. 7.50 per liter, by filling up the tank, our friend saved Rs. 300.

If one had to wait in the queue for an hour and a half, the cost of time would be Rs. 200 per hour, as someone saved Rs. 300 by spending 1.5 hours. If one had to specially go from home to the petrol pump, you have to add the fuel burnt for the travel.

Add to that the mental agony of waiting for what feels like eternity. In the heat of May, some kept the car AC running, burning some precious petrol. It only required burning 4 liters of petrol to spend what was saved through the effort of queuing up.

We often behave in such amazing ways that appear to be very rational, until someone thinks dispassionately. What looked rational was actually the response to a pain caused by the petrol price hike.

The human brain is wired to think rationally and irrationally, simultaneously. Very often, our responses are completely rational; very often, totally irrational. Such inconsistency makes us normal human beings.