Category: Your Money

The Little Book of Behavioral Investing: ADHD Investing

We’re on to Chapter 13 of The Little Book of Behavioral Investing: How not to be your worst enemy and I thank you for your patience in sticking with my enterprise through the last 13 weeks. So… 13 weeks, 13th chapter, and I’m thinking, “13 … doom and despair, huh?” But then, Montier’s words quickly come to mind. Think back to Chapter 5 where he warns us against inadequate research and the folly of giving in to the noise.

Cover of "The Little Book of Behavioral I...

So here’s what I did. My belief that the number 13 is associated with all things bad and dark … not that I’m superstitious but the thought is just there … is the remnant of old stories, propaganda, and yeah, some crazy horror flicks. So I checked it out and turns out I’m wrong. According to numerologists, the number 13 means upheaval but it has the power to enhance positive outcomes if change is adapted to gradually. Whad’ya know? Montier’s tips aren’t only helpful for investments!

But back to Chapter 13 and the point of discussion this time is about as challenging as it can get, especially for the modern Indian mindset. That’s my opinion by the way, not Montier’s. So, what would Montier have us learn in this chapter?

  1. Curb your action bias.
  2. Inculcate the quality of patience.
  3. Be at peace with doing nothing.

It seems shockingly simple but I can vouch a 100 percent that this is going to be an incredibly challenging practice for the investor community where so many suffer from the attention deficit hyperactivity disorder (ADHD).

In the modern world, doing nothing is interpreted as laggardness. While I don’t recommend you become a couch potato in physical terms, you need to be one if you’re a money manager, according to Seth Klarman. Why? Because you’re an investor, not a trader. And a good investor sells and buys only when the time and price is right. Remember the investment plan we discussed in Chapter 2prepare, plan, and pre-commit?

Sadly, not many money managers believe in this approach. And if they do, they can’t stick with it because their inaction would be interpreted as inefficiency by their managers and clients. They may also not want to upset the comfortable web they’ve spun for themselves via the prevalent money making mechanics.

People who are seen doing things (as in invested fully, selling and buying every so often) are perceived as more committed and efficient versus those who wait and watch. This perception becomes even more skewed if the investor has recently incurred a loss. While this unexciting investor may actually save dollars and build richer returns in the long run, not many people look beyond the short-term. And that, my dear friends, is the root of the problem.

It is also why I say that the learnings in this chapter may be specially challenging for the Indian mindset. All around, we see examples of short-term palliative measures. Governments use price controls to appease people even though it’s proven they have a detrimental effect in the long run. Government subsidies, free provisions, super low interest loans – sugared pills for vote banks – backlash over time to bite the same group of people. As individuals, we bribe, ignore, and submit to corruption because we’ve become habituated to quick solutions. Obviously, quick money solutions win the top spot for us.

The best investors of the world (and there are many Indians on this list) always look long-term. They are not driven into foolishness by an action bias of their own or external pressure because they’ve learned to be at peace with doing nothing. And the way they do this is by sticking with their investment plan.

To conclude: Get rid of the idea that investing is exciting. It’s not supposed to be. If you really want to make money, wait for the fat pitch. If that makes you the butt of criticism, remember that the road to your dreams is often lonely and rough. Think of all the greats!

Monica Samuel is doing a chapter-wise review of the book: The Little Book of Behavioral Investing: How not to be your worst enemy by James Montier. You can follow the series by following this tag: tlbbinvesting or by subscribing to this rss feed: tlbbifeed

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Every night at 8pm, we publish an automated, auto-summarized post that links to every single market moving piece of information that was reported that day.

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#weekly

A summary of what happened to stocks during the week. Plus a whole bunch of information regarding interest rates, portfolios, etc… updated on a weekly basis (every Saturday morning).

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#monthly

A summary of what happened to stocks during the month. Plus a whole bunch of information regarding interest rates, portfolios, etc… updated on a monthly basis (the day after the last working day of the month).

You can access archives and subscribe to the “monthly” tag in your news reader: http://stockviz.biz/tag/monthly/

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Monthly Recap: Failing By Design

monthly nifty performance heatmap

The Nifty ended the month -1.95% (-3.50% in USD terms)

Index Performance

Banks dragged while midcaps rallied…

monthly index performance

Top Winners and Losers

DIVISLAB +18.49%
TATASTEEL +19.62%
ADANIENT +26.73%
UBL -14.28%
TITAN -14.28%
BHARTIARTL -10.92%
Cyclicals caught a bid and quite a few stocks went parabolic…

ETFs

INFRABEES +1.91%
JUNIORBEES +1.40%
GOLDBEES +0.36%
NIFTYBEES -1.84%
BANKBEES -2.47%
PSUBNKBEES -3.08%
Month-on-month, PSU banks still sucked while gold treaded water…

Yield Curve

Rates drifted up…

monthly india yield curve

Interbank Rates

Zooming out to look at the big picture:

interbank lending rates

Sector performance

monthly sector performance

Investment Theme Performance

The simplest Value Theme, Quality to Price, out-performed Momentum. Typical when markets are gyrating and momentum algos can’t latch on to a trend…

Thought to sum up the month

Techpinions’ article on why Microsoft is failing has a number of quotable quotes:

If you don’t make a total commitment to whatever you’re doing, then you start looking to bail out the first time the boat starts leaking. It’s tough enough getting that boat to shore with everybody rowing, let alone when a guy stands up and starts putting his jacket on. ~ Lou Holtz

 

It is better to run back than run the wrong way. ~ Proverbs

 

Motivation alone is not enough. If you have an idiot and you motivate him, now you have a motivated idiot. ~ Jim Rohn

 

In this business, by the time you realize you’re in trouble, it’s too late to save yourself. ~ Bill Gates

 

Its a wonderful read.

Source: Microsoft: Failing By Design

Weekly Recap: Poverty Thoughts

Nifty weekly performance heatmap

The Nifty shot up +3.01% (+4.05% in USD terms) this week. Midcaps and banks led the way…

Index Performance

index weekly performance

Top Winners and Losers

BHEL +14.00%
CROMPGREAV +15.70%
JPASSOCIAT +16.16%
APOLLOHOSP -4.57%
MPHASIS -3.21%
BHARTIARTL -2.65%
JP Associates did a parabolic up-move… next stop: infinity!

ETFs

BANKBEES +4.50%
NIFTYBEES +2.86%
INFRABEES +2.41%
PSUBNKBEES +2.30%
JUNIORBEES +1.94%
GOLDBEES -0.14%
Banks stole the show, followed by infrastructure… the market might be smelling a turnaround and likes it!

Advancers and Decliners

Can you spot the small uptick in sentiment?

advancers and decliners

Yield Curve

india yield curve

Interbank Rates

mibor interbank rates

Investment Theme Performance

High beta outperformed while Velocity lagged… regime change in progress?

Sector Performance

Why in the name of God are textile stocks rallying? I thought we long since ceded to industry to Bangladesh and Vietnam?

india weekly sector performance

Thought for the Weekend

Heart wrenching:

You have to understand that we know that we will never not feel tired. We will never feel hopeful. We will never get a vacation. Ever. We know that the very act of being poor guarantees that we will never not be poor. It doesn’t give us much reason to improve ourselves.

Source: Why I Make Terrible Decisions, or, poverty thoughts

Sunday Long Reads

Could hangovers soon be a thing of the past?

Imagine an alcohol substitute that removes all negative effects associated with drinking, intoxication, and even the dreaded morning after. “So in theory we can make an alcohol surrogate that makes people feel relaxed and sociable and remove the unwanted effects, such as aggression and addictiveness.”

The wet cure

Has democracy actually done more harm than good?

Meet the neoreactionaries: mostly former libertarians who decided that freedom and democracy were incompatible. “Demotist systems, that is, systems ruled by the ‘People,’ such as Democracy and Communism, are predictably less financially stable than aristocratic systems. On average, they undergo more recessions and hold more debt. They are more susceptible to market crashes. They waste more resources. Each dollar goes further towards improving standard of living for the average person in an aristocratic system than in a Democratic one.”

Geeks for Monarchy: The Rise of the Neoreactionaries

Kill The Aid Industry

Donated clothes decimate local textile industries. Shells of buildings, silted dams, and unfinished “pilot projects” dot the African landscape. Young white people flock to expensive hotels for useless “conferences” that amount to paid exotic vacations. Peace Corps yahoos are flown out at great cost to teach Western hairdressing […] But aid’s worst consequence is the continuation, and amplification, of the attitude that change must always come from outside.

Let’s Kill The Aid Industry

The basic income movement

With globalisation, the share going to labour has withered everywhere, in countries as diverse as China, India, the UK, USA and Norway. In the future, the only way those relying on labour could raise their living standards will be by sharing the rental income gained by finance and capital investment in the global economy. We must imagine a new system of distribution, in which the whole of society receives a share of the rental income currently being taken wholly by financial capital.

The precariat needs a basic income

Are markets ever rational?

For markets to be efficient, we need to enable all 3 types of market participants:

  1. Fundamental/value investors
  2. Relative value investors or arbitrageurs
  3. Speculators

Each of these investor type plays a different and necessary role in ensuring that a well-functioning market is able keep the cost of capital low, absorb financial risks, and allocate capital efficiently to its more productive use. A well-balanced market is relatively stable and allocates capital in an efficient way that maximizes long-term economic growth.

When are markets ‘rational’?