Learnings of 2020
Last few months have seen an overdose of webinars, debates, interviews and news coverage on multiple aspects of the present crisis but there are few key takeaways which are relevant and contextual for the current scenario. These learnings of 2020 are highly likely to stand the test of time and pour oil on troubled waters. Let us discuss few of them.
1. Recency Bias
What a big impact this has on our minds! We’re known to have short term memory — we only remember things that have happened in the recent past (usually <1Y). The thoughts, discussions, purpose of investing prior to this period are totally forgotten & we get consumed with the current issues which alters our thinking. The rush to buy gilt funds, a quick trade in a penny stock or enquire with 3–4 people about their views on gold. Now you have ‘analysts’ predicting Gold at 81000 levels in 15 months. See the coincidence? ‘Jo chal raha hai, usko aur chalao’. Price movement often determines the narrative. Unfortunately, most people fall for it — hence you see bigger inflows into the asset class that have done well in the recent past.
2. Generalising & swinging to extremes
A crisis like this typically brings major economic challenges. Recently, we had a major event unfold in debt funds — The winding down of 6 schemes of an AMC. A lot was said & reported after this. Massive redemptions followed for the whole industry. Fear mongering made the people who have nothing to do with mutual funds comment & question its existence. Half baked knowledge, exaggerated comments & theories spread via social media and it was R.I.P. credit funds — an extreme view was taken. The only go-to category seemed AAA/Sovereign bonds. Everyone forgot — There are good companies in the AA or A category as well & AAA rated companies have defaulted as well in the recent past! Every category of funds has its risks. Simply making judgments that AAA is good, rest is bad is very premature. A mistake of few victimizes all other players in the category. Currently, we are at one extreme but remember — extreme swinging happens at the other end of the spectrum too, during euphoria. Any poorly run generic company will also be sold like gold-dust in a raging bull market. It is not a prudent approach to generalize and become a victim of stereotyping.
3. Stories sell but they change form
There is no doubt that a good story sells faster than a technical/complicated presentation. However, the way it grabs your eyeballs changes from time to time which hinges from the recency bias. A recent report had become popular which had a table showing how NIFTY50 has lagged Gold returns in the past 10Y. Convenient isn’t it? When we’ve had the worst crisis hitting the global economy that a safe haven’s return is mapped to the riskiest asset. The truth is there is no science to predict gold returns. When times are uncertain (like it is now), gold tends to do well as people look for the last safe resort. How about showing 25 years returns or showing the 10 years returns as of 2018 instead. The numbers will change completely & a different story is spun.
4. We read less, hear more
The sad truth which one has to accept is that we just don’t read enough. If you wish to be an astute investor, then ~80% of your time is to be spent on reading. All the great ones do it. In current times — we rely on news articles, TV interviews, expert opinions, WhatsApp university (which is by far the worst). Most of the opinions are one sided and only a handful of them give a balanced view. One ought to give adequate time to read good books, magazines, select expert’s blogs or articles, etc — there is no escape from this if you are to make informed decisions. One of the best things to read is history — it can teach you so much about past crises, the after effects, reaction of investors (behavioral finance), mistakes, etc.
It’s difficult to get yourself to read & cut the noise (especially your smartphone) but you must force yourself to do so.
- Cut the noise & fortune telling. Coming off the last point, although this sounds cliché, we can’t stress how important it is to have a rational & logical mind in times like these. Please remember: -
- Bad news sells better, and spreads faster. Hence positive news seldom appears on newspapers or don’t have media anchors shouting their heads out about it. Please remember — more people wake up to do good deeds everyday v/s the bad.
- An old & a bad habit of ours — we wish to know the future prices, movements, etc. How often are we (including us) wrong? Surely the result is worse than the probability of a coin toss. Would anyone had predicted the fall of March-April? Did anyone expect that the NASDAQ will be breaking the all-time high in June in the midst of the coronavirus or that NIFTY will recover ~42% from the March bottom? There are factors that influence the market prices in the short run — which are beyond our control.
A decade can happen in a few months, years can happen in a few hours. Trying to predict or extrapolate the future with accuracy is almost unattainable.
Article by:
Rushil Dedhia — Rushil is associated with Sapient for over 3 years and handles a diverse set of clients. He is an Electronics Engineer and also holds a Masters Degree in International Business. Rushil is an avid investor himself and has keen interest in cricket, football and travelling.
