Roop Malik, the winner of Infosys and the Shanti Swarup Bhatnagar award has been studying molecular motors since last 16 years. He describes molecular motors as a porter carrying suitcases which may be bacteria, balls of fat, pathogens, mitochondria etc.,
They move these suitcases from one point to another.
This motion delayed by even a few microns per second can cause disease.
Every-time whether it’s a body part or human nature that goes against the grain of what’s expected, accidents tend to happen, with adverse outcomes.
Doctors, scientists, psychologists have analysed these movements and behaviors for decades trying to figure out why does it happen the way it does.
In his book “Everybody lies” Seth Stephens gives example of a study that showed women admitting to have intercourse 55 times a year of which 16% of the time they used a contraceptive. This added to 1.6 billion contraceptives. A similar study on men showed use of 1.1 billion contraceptives. However a according to Nielsen the actual sale of contraceptives amounted to only 600 Million.
Who’s lying? Of course- both
Why did people lie-in the example above you can attribute it to “Social desirability bias” that leads people to overplay perceived “good behaviour” while underplaying adverse “bad behaviour”.
The molecules that don’t work can be easily replaced with behavior that doesn’t work in the right direction.
However this very bias causes irrational decision where they ideally should not causing Risk-Aversion when it should not.
Investors tend to invest at the Peak lured by past returns and run away for a long-time after suffering losses failing to take advantage of favorable risk-reward.
Risk Aversion Vs. Risk Avoidance
Investors often get hung-up on perceived risk or lack of it.
X will happen-resulting into Y so let me wait it out;
However what happens when X is Gone, Y has happened: What does it change?
The Investor who invested prior to “X” happening and the one who invested post “X” happening are at the same level from there-on;
Unless they are traders, there long-term investment is not going to be impacted by “X” or “Y” but the quality of “WHAT THEY BOUGHT”
Here is a classic example:
Now here is a company where nothing happened for the longest time;
Than it went up 4-times over 18-month period between Jan-2010-June-2011 and again lost 85% value over the next 6-months;
Today it’s up 400 times from the bottom in 2011-December;
Even for the investor who invested at the peak in June-2011, the investment is up almost 100 times today;
An excellent return by any measure;
What’s’ the HACK?
Identification of the right investment is the key;
If it’s a business that you are investing in, here are the 2-things to be kept in mind:
- Is it a Good Business?-is the business, the sector in which its operating growing with potential for growth and is the management honest;
- Price-Am I buying this business at a Fair price
If it’s a Fund strategy, you need to establish the same through an analysis of the current or proposed underlying businesses.
Even after this due-diligence, you might face losses in market volatility and that’s when you do the following:
- Re-visit your rationale for the investment;
- Analyse the underlying to understand if it continues to stay true to the story
If these 2-things look in line, go ahead and not just maintain but invest more;
Its All About Discipline, Silly
End of the day, its all about
- Maintaining a discipline with yourself or the individual who advises you;
- Establish a written rationale;
- Re-visit the rationale periodically
- Change, if required
Hopefully this will help you stay the course