When a lot of people first start to read & learn about investing they invariably end up reading about Warren Buffett in their first few weeks of reading. From there onwards begins this fairy tale dream ride into the idea that someday they can also invest like Warren Buffett. The next automatic step that people tend to take is to read what any other fund manager worth their salt has to say about Warren Buffett. To remind you, at this point there is not a single rupee invested by this person, ever in his life (apart from may be the automated Fixed Deposit certificates & PPF investments).
After having read & being enamoured with Warren B’s performance & his dazzlingly simple explanations of how he analyses businesses, people start with the notion that investing is an easy affair. By this time, the activity of really sitting through an entire market cycle not being able to find great investment opportunities or even spending huge amounts of time & effort in researching industries & their managers has never happened to them.
The problem with a beginner learning to invest is that we tend to immediately get sucked into the investing blog world. In this world, a lot of people are strikingly original in researching their own ideas while a lot are “me too” people who are constantly following what other smart fund managers are doing. Not enough effort is spent to understand why investing is important & what are their unique needs to invest. People rarely do any cash flow analysis of their own life & are massively unaware of their own patterns of spending & making money. People automatically assume (especially salaried people) that they will somehow have enough money by the end of the year to put into some tax saving mutual fund & not to forget the mammoth 8% “tax-free” compounder of public savings – The Public Provident Fund.
Any person who wishes to take charge of their investments & wants to compound their savings at a rate of at least 5% more than the fixed deposit rate has no other legal option but to invest in Stocks.
Over confidence is a peculiar feature in humans which has sometimes made us do phenomenal things and also allowed us to make colossal mistakes. It is true that in order to do something totally remarkable & unique we need to have a high level of overconfidence in our ability to achieve. This overconfidence comes from our optimism to do something. Overconfidence in this context is very useful which tends to motivate us & keep pushing till we succeed. It is like Thomas Edison whose optimism to tinker with the light bulb & his overconfidence in his abilities to actually make it, led to a remarkable invention.
The dark side of overconfidence comes into picture when our overconfidence hurts us by blinding us to very obvious errors in judgements. It is like watching a Superman cartoon & going on the rooftop to see if we can fly too. Generally the dark side of overconfidence becomes obvious only in hindsight. But we need not be suckers to overconfidence all the time. Becoming aware of where we tend to be overconfident can protect us from making a rash decision.
In this phenomenal book Mastermind – How to think like Sherlock Holmes written by Maria Konnikova she uses the great fictional detective’s ability to solve tough criminal cases to explain how we can train our brain to become as sharp as Sherlock’s. In one chapter she mentions how even someone as sharp & mindful like Sherlock Holmes can fall prey to the dark side of Overconfidence. She lists four major instances where overconfidence has been most prevalent.
Quick question: When was the last time you woke up in the morning and felt completely certain about the way your day would pan out? Sure, you may have aimed at accomplishing a series of tasks and also meticulously planned your path. Despite this, you tacitly knew and acknowledged that there was always the possibility that things may not turn out as planned. This, however, did not paralyse you and make you sit at home. Continue reading
Warren Buffett has apparently said in jest that out of the seven deadly sins, envy is the worst….because at least we enjoy while committing the other six sins. In case of envy it is only pain and no pleasure.
Despite this, I notice that envy is widespread in our society. Here are a two instances:
A client of mine met me last week. I noticed that he was not his usual chirpy self. When I inquired about the reason for his despondency, he explained that he was perturbed to note that while his Portfolio Management Scheme (PMS) Account with our firm had given him a return of 12% over the past year (no mean feat, considering the the broad indices were actually down by 17%). It perplexed me that instead of being ecstatic he was downcast but I soon knew why. Apparently, his friend had invested in another PMS account which also invested in Gold Exchange Traded Funds. Hence his friend had earned a return of 21% on his investment, which apparently gave him bragging rights over my client.
Every year once the annual bonus is distributed among colleagues at my company, I always notice a few glum faces. In most cases, they are not glum because they feel shortchanged, but are dejected because a few of their colleagues have received slightly more than them.
How do we deal with this debilitating feeling? While I do not profess to be a psychologist or psychiatrist, here are a few options that work for me. Continue reading