Information overload?

Jayant Pai | jayant@ppfas.com

Don’t get confused. Create a reading list of your favourite newspaper, website, research house to take informed decisions

This article was published in Business Standard newspaper dated September 2, 2012

Buy ‘X’ share, sell ‘Y’. Stay invested in mutual funds… exit some schemes. Outlook for gold is good…sell gold…

Different channels, newspapers, websites, blogs, research reports… sure, there isn’t dearth of information. While business channels and magazines were anyways into an overdrive, many general news channels have also jumped into the fray. The worry: Much of that viewership is only for the daily stock market related programmes and not for other personal finance programmes. And even among personal finance programmes, many question sonly pertain to stocks, with other aspects (such as insurance and mutual funds) taking the back seat.

It is, therefore, surprising that despite our seemingly avid interest in the stock market, every day we hear that retail investors are exiting the market or stopping systematic plans and so on. In fact, the quantum of wealth actually invested in stocks is barely 4 per cent. Even mutual fund distributors have actually come down, and not gone up. Though many blame it on the entry load ban, the jury is still out.

Obviously, this overload of information and the so-called keenness to know about stocks and their future has not translated into much real money coming into the markets or for that matter, mutual funds. Why is this so? Some of the reasons could be:

Too many advisors but no accountability

This is paradoxical but true. Rather than increasing the number of investors, the rate of rise in the advisors hasn’t really helped them. Though there is no data to back this up, one can clearly see it from the absence from retail participation in the market.

Many complain that they are confused by diverse views. The fact is that it does not take much to be a stock market pundit. Spout a few words of jargon, pop-up on a couple of business channels and voila… you have a fan following. Follow this up with a website dedicated to proffering “advice” for a subscription fee and you are ready to go. However, when it comes to accountability for the advice, these people turn coy, blaming everything (even acts of God), except themselves when stocks do not perform the way they say they will. There is also no rating system of how many ‘hits’ or ‘flops’, these so-called advisors have.

But if any retail investor has burnt his/her fingers by putting their money on their advice, the financial loss is good enough to put them, perhaps, even their near and dear ones off. In other words, the absence of accountability hurts the overall sentiment towards stock markets very badly, as many stop investing after being saddled with a few dud recommendations.

Too much data but little explanation

Till recently, research agencies would criticise companies but not give a ‘sell’ because the banking or broking or other arms of the group would lose business. While much of that has changed because of overall bad market conditions, investors are often confused that even after reams of data pointing against a company, why seldom there is a ‘sell’ recommendation.

In other words, there is a “Tyranny of Choice” when it comes to market information. The ticker rules our lives (thankfully, we are spared on weekends), we are bombarded with statistics of all hues, be it the cash segment, F&O segment, institutional activity, quarterly results, etc. Unfortunately, just as a glass can hold only so much water, our brain ceases to process information beyond a point.

Feeding it with more makes it freeze into inaction. Many are in that state nowadays, overawed and overwhelmed by the deluge of information, but there is seldom concrete solution or recommendations.

Few can stomach volatility

We are spoilt. In the good old US-64 days, we were promised 18-20 per cent without any labour. Despite the realisation that the scheme had to be stopped because it promised too much without the fundamentals supporting it, we still want to live in those good old days.

Often people inquire with me as to which stock is a good investment. While I do not have an idea a day, I do name a few good stocks once in a while. However, after a few days or weeks when I ask them whether they have invested, most of them say they have not done so, because the market is too volatile right now and they are waiting for it to stabilise. Well, I often joke that markets are stable only over the weekend and that too because they are closed. Volatility is part and parcel of any market. If you cannot stomach it, you should not be inquiring about stocks in the first place. Also, the media, instead of assuaging the viewers actually feeds on such volatility and makes mountains out of molehills making remarks like “Market crash reduces investor wealth by thousands of crores”. Extreme statements like these, scare off several potential investors who are sitting on the fence.

I think the best way to deal with this situation is to cut ourselves off from the clutter. Mentally, we can create our own list of favourites such as one favourite TV channel, one favourite website, one favourite magazine, etc. and stick only to those. They usually talk about the same developments anyway. With regard to self-styled advisors, zero may be a good number… After all, often their guess is as as good as ours.

Also, it would help if we changed our mental model of investing from one of action to one of inaction. Every source mentioned above (stockbrokers included) want you to do something. The shorter your horizon the better for them as they generate more income off you. Well, frustrate them by holding on to good investments for long periods of time. Stop being the sacrificial lamb at the altar of their greed.

Finally, treat volatility as a good friend who actually helps you buy good stocks at reasonable prices during panics.

Dealing with behavioral biases

Parag Parikh
Human thought processes are an amalgam of experience, intuition and rationality. Our actions are usually based on the belief that we know what is good for us. However, many times those actions are based on impulses which may actually be detrimental to us in the long run. Also, since the feedback mechanism is often not instantaneous, we bear the consequences of our actions much later. By that time it may be too late to remedy the situation. This behavioral tendency is visible in every aspect of our lives be it education, health, money, relationships etc.

While academics steadfastly cling to the ephemeral notion of “Rational Man”, there is an irrefutable and growing body of evidence contradicting this. If humans were truly rational, then all of them would have behaved in a very similar manner. For instance, the traditional regimented route to success is : Finish your schooling, go to a “reputed” college, pursue a “safe” degree and get a “good’ job, which until recently meant either a doctor, engineer or lawyer.

However, over the years, an increasing number of students have chosen to go on the road less travelled and guided by their heart, have chosen off-beat courses such as wild-life photography, linguistics, etc. At the outset, virtually no one knows whether they will be successful or not. However, that does not deter them from putting in their best effort. My point is, even in a relatively unadventurous field such as formal education, many a time, the heart rules the head.

Coming back to the core subject of this article, whenever clients visit advisors, they expect us to solve all their financial problems and want us to assist them in attaining all their financial aspirations. However, I have observed that they display several cognitive and emotional behavioral biases while interacting with us. Here are a few of them:

Optimism Bias:
Many a time, clients visit us after they have experienced some kind of financial trouble. It could be related to debt burden, the tendency to over-spend, a job loss etc. At that point they are overly optimistic about our ability to provide quick-fix solutions and immediately get them back on track. Often they fail to comprehend that it takes a joint effort on the part of both, client and advisor, to emerge out of the rut.

Representative Bias:

Many times clients compare us to their family doctor and expect that we will provide them with the equivalent of tablets which will help them recover in a few days. While, it is true that there are some parallels between the two professions, we are more adept at providing solutions which will help you in the long-term rather than the short-term. In other words, feedback mechanisms are often not instant, in our case. On a lighter note, I think it would be better if they compared us with to dieticians rather than cosmetic surgeons.

Sunk Cost Fallacy:

Clients persist with products which are unsuitable for them, simply because they have paid for them. Investment oriented insurance policies are good examples. The policies that they currently own may provide a low life cover and may be opaque & difficult to understand, Yet they are reluctant to surrender them, despite us pointing out better options. This is because they have already paid the premium for the past few years. Consequently, they are unwilling to bear any surrender-related losses, even if rationally they should be agreeing with our contention that in the long run it would be costlier to continue with the policy.

Confirmation Bias:

Often, certain long-standing beliefs have already ossified in clients’ minds when they approach us and it is difficult to suggest something which is contrary to these. For instance, if we suggest increasing equity exposure to an avowed debt investor, he may diligently point out all recent instances when the equity market has crashed. At the same time, he will not accord any weightage to the stellar cumulative performance of the stockmarket over the past two decades or so.

In other words, he will cling on to examples which fortify his belief that stocks are risky and conveniently ignore the ones which disprove this belief. To such people I cite several examples of companies reneging on their debt obligations.

Bandwagon Effect:

Everyone is more bothered about what the others are investing in rather than researching which product suits them the most. For instance, over the past one year, when Fixed Maturity Plans (FMPs) were in vogue, many of our clients were keen on opting for one year FMPs merely because some acquaintance or the other had done so.

This included clients who needed to utilise the same money within the next six months and for whom the illiquidity of the FMP was a big negative. It took a monumental effort to make them jettison this idea and convince them to park their capital in short term debt funds.

While there are many more such biases, the moot point is that while dealing with humans (and especially on a touchy subject like their finances), advisors must treat irrationality as “par-for-the-course” and not be surprised at anything that confronts them. This is more art than science. That is where experienced advisors score over the rookies who merely go by what their courseware states.

 

Small Savings Schemes – Semi-deregulated interest rate regime ahead

Jayant Pai | jayant@ppfas.com

By now you must be aware that the interest rates on Government Small Savings Schemes (SSS) have been increased. Newspapers are going around town proclaiming that this is a bonanza for small investors. Well, it is true that soon (Most probably from December 1, 2011) you will be earning more by investing in these instruments but in a way this move is similar to the recent deregulation of bank savings account rates by the Reserve Bank of India .  Continue reading

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Recently, I read a few media articles railing against the launch of “Semi-Fixed Rate Loans” by a couple of banks. Here the borrower is charged fixed rates for a certain period – say two or three years – and then has to pay Equated Monthly Instalments (EMI) based on a floating rate (usually linked to the bank’s Base Rate). Continue reading

“Insuring” yourself against misselling

Financial advisors often castigate insurance companies for designing products which are expensive (such as Unit Linked Insurance Plans or ULIPs) and opaque (Traditional Plans such as Endowment and Money Back Plans). This incessant barrage has galvanised the Regulator (IRDA) to make certain policies more “investor” friendly but it is yet unable to plug last-mile loopholes which occur in the form of sharp selling practices.  Continue reading