When you are an investor with a reading and ‘intellectual’ arrogance, you end up having some problematic biases! You need a comprehensive plan to counter them.
What are these biases and how do you counter them?
Bracketing oneself: If you have read Graham, Buffett, Fisher, etc, it feels great to call yourself a ‘Value Investor’ (VI) and even today it is sexy to call yourself a VI, because it feels very intellectual. It is not easy being a VI in a market on steroids, which is not giving too much of an opportunity for the past few years!
Look at the BFSI valuation, if you are a VI with a Graham kind of a process, will you be able to buy anything at all? How long will you hold on to your cash?
The Peter Lynch bias: PL is a person who increased my contempt for worrying about macro. It is true you cannot control the macros and it is of no great use worrying about them, but ignoring it totally makes no sense.
‘Value Investors are superior to others’ bias. Wrong argument, but we wear it on our sleeves.
Trading is for the lesser mortals! Most investors will quickly say, “We are not traders, we are investors.” I have no clue why this intellectual superiority. George Soros runs a good wealth business where he does a lot of trading; and believe me, his business is far less opaque compared to the richest man in the world. In fact, far more open. As a student, he is a better person to track, especially if you are worried about world macros.
Over-researching: Missing of the obvious is a huge mistake that intellectuals do. I remember the Liberty-Coromandel International deal. The ratio was overwhelmingly favouring Liberty (price-wise since CI had moved up, but L had not). We kept doing the deals wondering why big investors weren’t catching onto the transactions. Not even alert HNI did the deal (remember LTCG was nil) and I replaced my whole CI portfolio with L shares. I still do not know how some of my Hni and super-Hni friends missed the deal. They knew about it and had the shares in their portfolio.
‘I have to do something different’ mindset. How can I just buy more of Cummins, Siemens, Nestle, Hdfc, etc. This is known! I need to look for something far more exciting. Sadly, such research is very tough, and in most cases, unnecessary. We can always leave this to our VC friends.
Not removing the cobweb of poor management: I have had poor experiences in the past dealing with Shriram Group (South), had poor investment returns from Aditya Birla Group, did not like Hyderabad-and-Delhi-based promoters (my equity research days). And it continues. I have not been able to participate in Shriram Group ever after that experience in 1993/4 or earlier. Such strong biases hurt badly if you are a fund manager. I cannot overcome some of these biases.
Home bias: It is only recently that I have some USD-denominated assets. Otherwise I have a fully domestic portfolio. This flies in the face of my longer term view that Indexing will work. For Indexing to really work, only 2 per cent of my portfolio should be Indian!