Value Discipline

What should you reward or recognize an advisor for? Poll investors and you will get an overwhelming verdict favoring returns. Most investors believe the only reason they need an advisor is to give them more returns which they dont have the time to find themselves. The advisor is meant only to give them performance.This leads to several judgemental biases that follow. Firstly, investors believe that the advice is needed only at the time of buying. If the buying decision is right, then they think that the course is set. Secondly, they feel that there is not much for an advisor to do once an investment is made. Essentially, investors undermine the importance of an investment process. While, choices are important, there is much more to investing than choices. Choosing not to buy what is popular is a difficult choice. Most investors are unlikely to pick that option. Only disciplined advisors are likely to tow that line. Choosing to buy what is out of fashion is an even more difficult choice. Few people will do it. Especially so, when these unpopular choices need to be made in the face of adverse circumstances. But, the most experienced investors get their extra returns largely from difficult decisions. To get these decisions right, they have a solid investment process that they build, fine tune and develop over years. Good advisors should be able to lend a sound process to the investor. This would enable them to benefit from a positive investment experience, enhance their belief in equity as an asset class and to believe in process driven investing. This brings us back to the opening question. What about returns? Often, returns are taken on face value. If investors fail to see if the returns are generated through disciplined investing, there is a high probability of loss of capital. Remember, huge positive returns in tech, infra and power funds in 2000 & 2008, turned into massive losses in just 12 months. Returns never tell you the true health of your decisions. Discipline is a far bigger attribute than returns. When investors value returns over discipline, losses are bound to follow.


“Everyone finds the right conviction. When one finds it really matters.”

Avoid the froth

We have been bombarded over the past few weeks by the billion-dollar sale days from e-commerce sites of all hues. We were induced by these sales into buying even what we don’t need. And, people were so enticed by the discounts that they were willing to buy more than they actually planned. In fact, a lot of buying on these sale days were impulse and discretionary spends. Most people also bought stuff they didn’t really need just because they were cheap. There is a lot of reckless buying as much as there is responsible buying happening on these days. The stock market is also seeing a fair degree of reckless buying. People are buying stocks on impulse and the valuations, unlike the billion-dollar sale days, are hardly attractive. In stock markets, price behaviour seems to be the opposite of what happens on Snap deal. The lack of liquidity in popular stocks is taking their prices higher. So people are paying a higher price to buy. Naturally, this will translate into short term performance. NAV watchers get the sense that this froth is actually investment performance. And, more people are buying like there is no tomorrow. Investors must learn to manage investment purchases just the way they would shop responsibly on billion-dollar sale days. If not, their investing can descend to the ordinary and even far below.

“Rational behavior requires theory. Reactive behavior requires only reflex.”  – W. Edwards Deming

Focus on behavior

Investors see the same news, read the same newspapers, look up to the same icons and respect the same blue chips. The markets present the same opportunity to all investors. Information is freely available to all investors. Yet, why do just a small minority get it right while the masses end up messing up with their monies? What is it that makes the investing of a few vastly superior than that of the majority? The answer to this question can easily be dismissed as chance or luck. But, luck cannot consistently play out for decades and we would not have marquee investors. Surely, there is something the majority is clearly missing. The answer lies in the importance few investors give to their behavior while the majority just ignores even the need to focus upon it. The behavioral emphasis that a small minority show is what makes their investing distinct from the majority. The irony is that the community of practitioners in behavioural finance has not grown in real terms despite the great emphasis on learning the subject. This probably is because practice requires far more discipline than learning. Knowing something in theory is very different from practising it to perfection. Mr. Market always has a measure of investor greed and is working overtime to expose an investor’s behavioral weakness. Conscious investing is the only way to curb greed and create the right investment behavior. The coming months will test investors on behaviour.

Investment beliefs don’t really make a better investor. Investment behavior does.- Shyam Sekhar

Curb greed

Greed has a unique character. It creates great outcomes and then destroys whatever it creates. So, we tend to see its creative potential when we apply it at the right time. We also cant escape viewing its destructive side when we get greedy at the wrong time. Yet, most investing happens exactly around the time when we run the risk of destruction. Investors tend to dump all their money just around that time when they should think of staggering their decisions and showing patience. Greed and patience have the capacity to work perfectly in tandem. But, when greed and impatience combine, the result would be destructive to your investing. Investors must realize that greed needs to be matched by patience. When it is the wrong time, your patience needs to curb your greed. Uncontrolled greed will always end up destroying everything. The markets are at the crossroads where one needs to evaluate the serious need to curb greed. If one needs to achieve that, he needs to show enormous patience. Peers will be doing crazy things. The activity all around would be very high. To be calm and watching the madness is never easy. But, any experienced investor will tell you that there is no other way to beat the markets and make your investment strategy a winning  one. So, it is that time when patience must be controlling greed. And, the mind must sit still thinking calmly about the future. The world looks up to Warren Buffett for his enormous wealth creation. It is that time when one should learn the art of waiting from him. There simply cant be a better way of paying a tribute to the great investor.

Greed, in the end, fails even the greedy. – Cathryn Louis