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Emotions have no place in Investing

“Black and white shot of historic building with columns in Montreal with clear sky” by Etienne Martin on Unsplash

HDFC Bank has been 50-bagger in the last 15 years! That is, if you’d invested Rs 10,000 in the shares of HDFC Bank in 2003, you’d be sitting on Rs 500,000 today. It would’ve been a life-changing and a career-changing experience!

And now, HDFC Bank’s subsidiary- HDFC Asset Management Company (HDFC AMC) is coming out with it’s Initial Public Offering (IPO). Should you invest in it? Before we answer that, let’s consider a few things.

We are all genetically programmed to conserve energy. Energy was the currency of hunter-gatherers’ era. Even though today we have many currencies — real and virtual, our internal programming understands only one — energy. And we are designed to conserve it.

Decision making expends energy. Therefore we inherently dislike it and are programmed to like shortcuts that help us make a decision without expending too much energy. If you find yourself jumping to conclusions or concluding first and rationalizing it later, you now know why.

What would some of the shortcuts be that we’d normally use to arrive at the decision on whether to purchase shares of HDFC AMC or not?

  1. Association. Association transfers the likable or dislikable qualities from one to another. HDFC Bank is liked and so HDFC AMC becomes likable. Since HDFC Bank has been a 50-bagger, it’s very likely that the other one would also be a multi-bagger.
  2. Liking. A dear friend of mine subscribed to an IPO, because he liked the sales lady and since she was so nice, he thought he’d help her with her targets.
  3. Deprival. You are probably thinking — “I missed buying HDFC Bank and therefore I missed out on that life-changing investment. I also missed out on the AMC that got listed the last time and went onto become a multi-bagger. Therefore I won’t be deprived this time. I just won’t.
  4. Social proof. “Everyone I know and their uncle is buying this. Heck, the IPO is even oversubscribed! Even if I am wrong, at least I won’t be the only one.”
  5. Fear of missing out, Envy and Regret. “If I buy, and it turns out to be a dud, at least I won’t be the only one that lost money. But if I don’t buy and everyone else buys and it turns out to be another HDFC Bank, how can I live with myself then? Therefore it’s better to buy rather than not buy and regret later.

So on and so forth. We mix fear, greed, envy, regret and other emotions into what should ideally be an emotionless process. As you can see, the decision to buy or not is already foregone and only thing left is to come up the rationalization. “I bought it because…” (you can fill the blanks with smart sound bytes).

But as Warren Buffett cautions-

If you can’t control your emotions, you can’t control your money.

Therefore the decision to buy HDFC AMC or not should not be driven by emotions but instead by rationality. You should be able to write down a small thesis on why HDFC AMC is likely to generate more profits in the future and if it’s available at a discount to it’s intrinsic value. If you are unable to come up with an emotion-free thesis for why you should buy, it’s better to move on.