Begin With Self

“Understanding is deeper than Knowledge;

There are Many People who know you but very few who understand YOU”


I will add to the quote “not only very few people, but even you don’t understand yourself”.

Author Timothy Wilson in his sublime work “Stranger to ourselves” writes about the Temple of Apollo in Delphi, where almost two thousand years ago was written the maxim “Know thyself”.

One of the most powerful but underscored truth of all times.

It was left to Sigmund Freud to tell us that most of our mind operates unconsciously making it difficult to know ourselves.

There were several thinkers way beyond Freud who had talked about how a lot of our thinking is not only automatic but way beyond the realms of rationality as there are so many things that we just do despite what we think about them.

Explaining this complex phenomenon Mr. Wilson explains how our 5 sense take-in over 11,000,000 pieces of information per second with an ability to process only around 40 of them;

So where does the rest go.

The rest of it goes down the drain, hidden in our adaptive consciousness

From where it tends to influence our judgements, feelings and behaviour.

David Mcraney says in “You are not so smart” that:

“You are often ignorant of your motivations and create fictional narratives to explain your decisions, emotions, and history without realizing it.”

Our mind tells us stories to justify the reason for our actions.

So much of this becomes automatically applicable to the field of “investing” even without being expressed in as many words.

There is a process, a critical part of many a investment profiling questionnaires that talks about “Risk-profiling” which can be used to advice suitable asset-classes and products to investors.

More-often than not we find risk-profiling work very well till the time “everything is positive”;

The moment its negative compared to an alternate scenario, “risk-profiling” fails miserably.

They are nothing better than a journalist on TV telling us “Why did the market fall today”; or “Why would it go up tomorrow”.

The crucial question at this stage is how to use this information whether you are an “investor” or an “advisor”.

Viktor Frangel said “As long you have a goal, you can recover from anything”.

This is important. Till the time we can divest a situation from the “emotional power” that it has on us, we can overcome the effects of the same.

This is what I suggest:

  1. Set a process for each decision; especially important for the advisors;
  2. Understand “what you are trying to achieve” through a decision-Have a “GOAL”;
  3. Document the rationale for accepting or rejecting a decision;
  4. Review your decision periodically against the rationale and till the time the rationale stands



The Ownership Choice-II

 “We can’t control our greed”;

“You need to regulate us more”

This is what the CEO of a big bank told Henry Paulson-US Treasury Secretary in 2008.

Dopamine, both a hormone and a neurotransmitter, is used by the brain to send signals to other nerve cells.

While it has several uses, its most publicised impact, has been found in reward-motivated behaviour.

Any anticipation of reward increases the level of dopamine in the body.

Whether its Drugs like cocaine or physical Pleasure through sex, they have the same impact on the nerve system.

The interesting thing however is that the same activity doesn’t increase the dopamine the next time, and that’s where a lot of “rewards systems” tend to fail.

The anticipated outcome (read: reward) determines the acceptance or rejection of the reward induced motivation.

Unless the reward increases/alters substantially, dopamine levels don’t change dramatically, thereby determining the outcome of a motivator.

A study done by Henry W. Chase and Luke Clark, presents another interesting aspect that turns, the whole dopamine theory on its head.

Among Roulette players, dopamine levels increased, not only when the won a big stake but also when they had a near miss, prompting them to play the game again.

The other interesting, but underplayed outcome, that dopamine has as a neurotransmitter is its ability to help avoid “unpleasant experiences”.

Most of the financial advisors can by now relate to this basis their interaction with the clients.

There are 2-prominent categories that you always encounter:

The client who tells you, “I am ready to take RISK, but I want high returns”;

And the other that tells you “I am happy with low returns till the time my capital is safe”

Now as a Wealth Manager, you can use “Dopamine” very effectively by catering to the clients’ nerves by “telling them what they want to hear”;

That can be counter-productive as it might get an initial sale; however the low once the effect of “Dopamine” recedes will risk your relationship;

The important lesson is to use the tool with a defence mechanism that helps reduce the impact of the fall.

As a “Client”, this is even more interesting as most individuals find it difficult to control their impulses when “Dopamine” kicks;

Remember “Cocaine” and “High returns” potentially have the same effect.

The recommendation always is to have your own process; For example

  • Questions to be asked on any proposal;
  • Documenting the theory for agreeing as well as rejecting a proposal;
  • Sleeping-over a proposal before taking a decision either-ways

The proposition might still be compelling;

However at-least you have something to refer to before you make a choice and then you can own that choice.

The Ownership Choice

23 Jews were killed in Iran on Asura day in 1839 only because some people thought a Jewish women washing her hands in a dogs blood to cure herself of skin disease was making fun of the martyrdom of Husyn. The idea of Asura is to commemorate the sacrifice of Husyn and is definitely not sacrificing others.

Yual Noah Harari describes this in his book as a matter of choice:

When you inflict sufferings on others

“Either the story is true or I am a cruel villain”

Similarly when I inflict suffering on my self, there is a choice:

“Either the story is true or I am a fool”

As human beings don’t like to admit themselves as either fools or villain, they choose to believe that their story is true.

Most of the human life decisions can be slotted in these 2 boxes.

As Yual describes elsewhere in his book, if you buy a second hand fiat for 2000USD and it breaks down, you can just junk it but if you a Ferrari for 200,000 USD you need to go around talking about it to justify your decision.

Financial advisors and fund managers definitely relate to this.

Clients will come down hard when an advisor/fund manager decision goes wrong leading to under-performance, even if its in the short-run.

However when they have personally bought a stock, they are not just happy to stick to the decision, even though they lost money in the short-run, but are even willing to expand their holding.

How engaged one is to the decision thus impacts how an individual will react to the downside of the decision.

In behavioral science this is know as choice-supportive bias.

Individuals tend to downplay the faults of the choice that they make versus ascribing new negative faults to the option that they ignored.

There are important lesson for advisors as well as investors here:

  1. Risk is part of the risk-reward payoff whosoever makes the decision; just because the payoff was calculated doesn’t mean-risk is taken care of; 
  2. Risk is not only real-it plays off at some point in time-you got to prepare yourself for that.
  3. The key is engagement with the decision, which means:
  4. Did I understand the product, process, philosophy, 
  5. The inherent risks related to where I am in the market/economy/earnings cycle; 
  6. Am I just driven by short-term performance ignoring the short-term pain
  7. Pain is part of Patience-since 1914 when Dow was 66 points, the world has seen 2 world wars; 4-5 major recessions including 1929; 1997; 2008; 9/11, US war on terror etc., but still Dow has gone to 26000 points;

If you can be as patient with your Fund Manager as you are with your own decisions, your patience will pay-off

  • Essential is to have a written thesis prior to investing; unless that thesis has changed adversely, you need not change your path-whether managed by an FM or yourself

Own Your Decision & Just Stay the Course

Art & Craft

Leonardo Da Vinci dissected over 30 bodies during his life-time by his own accounts. There was a period in his life where he virtually lived in a morgue.

Why did he have such fascination with human body dissection? What did he gain out of these dissections? How did it improve his art?

The portrait of the Old Man with Ivy Wreath and Lion Head took over 15 years to paint.

Some of the written accounts around this period describe a perceptible change in muscle and nerve formations in this painting during these 15 years.

This obviously was a result of the body dissection exercise that Leonardo went through over these years.

While Leonardo’s Art was a mixture of experience, learning, intuitive skills and in-born genius, the way he honed his craft with his work around human bodies, use of light, reflection etc., holds several lessons for those learning to excel.

Lessons for the Lesser Mortal

Any professional looking to excel is thus looking to not just rely on the innate intuition but to hone the craft related to the job.

Technique, Process, Technique, Process………Outcome

Developing the technique to do things better and outing together a process that keeps you on track is the key.

The recent challenges faced by the Fixed Income market in India throws a great example:

Portfolio construction has always been a mix of art and craft.

Even when the objective is the maximize the return, the craft of “risk management” has to take its rightful place to ensure a balance.

What seems like a great idea on paper might increase the risk disproportionately for a product where the customer expectations are of stable returns.

Portfolio Construction and Management has always been a bit of art and craft challenge.

While intuitively a Manager or advisor can advice on a asset allocation, the underlying the asset classes and how the risk is being managed is really a matter of craft/science.

Which asset classes is adding to the risk and which one diversifying the risk is a calculation and that’s where the advisor/manager’s craft plays a role.

Investor’s Dilemma

The investor’s dilemma then is to find the manager who has mastered the craft rather then purely mastering the art.

Any Advisor/manager can impress you with knowledge, however there are several clues for the investor while listening to them:

  1. How many times does the discussion hover around the portfolio rather than the product?
  2. How many times are you advised against an asset class which the advisor has on platform and not only as underselling someone else’s advice?
  3. How balanced is the advisory vis-à-vis the questions being raised?

The bottom-line is don’t just expect the Advisor/Manager to have the “Art & Craft” but develop your own “Art & Craft” while taking a decision.

Beware though that you don’t get bogged down by details.

Keep it simple.

The above few questions are of-course a way to think.

You can do a few more things:

  • Develop your method;
  • Don’t focus merely on the outcome;
  • Think about the process and what’s the process that makes you comfortable;
  • Develop your time-horizon and review mechanism to track progress of the process that you have agreed to;
  • Have a written thesis for every decision of yours so that review becomes easier

Happy Investing

My Molecular Motors are Delayed……..

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.

Desirable Behavior?

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:

  1. Is it a Good Business?-is the business, the sector in which its operating growing with potential for growth and is the management honest;
  2. 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:

  1. Re-visit your rationale for the investment;
  2. 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;

Else withdraw.

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

Event, Reality, Life

October 05, 2011 was an eventful day for Apple as they lost their iconic CEO, Steve Jobs.

Here is a reaction from one analyst:

“Without Jobs, Apple’s rivals now have some time to step up and majors such as Google, Samsung, Microsoft and Facebook will try to fill the gap,” 

Shinyoung Securities analyst Lee Seung-woo told Reuters.

It has been over 6 years and Apple has just gone from strength to strength more than doubling their revenue from USD 108 Bn for 2011 to USD 228 Bn last year and all the attempts from the competition like Samsung and google has done nothing to dent its brand image and positioning amongst its loyal customers.

A death is an event so is a wedding

However often the event becomes the objective and not the harbinger of hope or celebration of a life?

Why Does An Event Engulf our Existence?

Look at participants in a wedding, funeral, or a vacation trip.

It seems that the conduct of this wedding, funeral or trip will be the defining moments for them and there will be no tomorrow-“life will come to an end”

That’s why the end of an event exhausts the participants as they invest so much in the preparation that, by the end, they are left with disappointment of the end irrespective of how well the event went.

The event, the frenzy that it creates in the participants and the deep sense of happiness or disappointment that it leaves behind makes it seem like “THE END”.

The Endless Wait for the Event

We often meet those who are obsessed with an upcoming event.

In-fact there are concerted efforts made often by vested interests to make the audience believes that this is the most important event of their lives and life will never be the same again;

Lets’ look at some examples:

  • The most important budget ever;
  • State Elections-make or break for opposition and the ruling party;
  • If You don’t select X, Y or Z, India will lose everything and go back 60 years

This is what great marketing is all about, play up the emotions, get the audience hooked, get your result or make your money and plan another trip for the audience:

What’s the Actual Impact?

Lets’ look at some numbers with respect to 5-year impact on stock markets post an election:

Election Month & YearOn Election Day-Sensex ValueReturn Difference Between 1 Election to Next (%)Type of Govt
Oct-99 4444.560Coalition
May-1424217.2465.59%Single-party majority

So generally speaking over a 5-year period the markets seem to go up rather than go down irrespective of the type of govt whether coalition or single-party.

In-fact a weak coalition during 2004-2009 produced the best stock market returns.

That’s shocking

Not really because markets represent businesses and businesses get impacted by policy of the govt. (only one of the many factors that impact them) along with competition; global business scenario, ease of funding, innovation etc., that go beyond who is sitting in Delhi.

So what should you do?

  • Don’t sit on the sidelines-whether you invest Lump-sum or stagger your investment, till the time your basic strategy is in place, in the long-run the market always rewards you
  • Stick to your Asset Allocation
  • Buy Quality businesses and invest with quality Fund Managers

Stay the course?

Dadar Local, Pavlov’s Dogs and Investors

Mumbai’s Dadar Local Train Station presents a unique picture of human behavior. Over 20% of the 7.5 Mn daily local train commuters originate from or come to Dadar everyday leading to amazing scenes during peak morning and evening hours. 

Dadar station is a transit point for commuters along western and central lines.

Commuters often joke about not having to move either boarding and alighting the train as the crowd pushes you ahead anyways. This is understandable given the massive crowds waiting to board or alight the train during peak hours.

The interesting observation however is what happens during non-peak hours when trains are relatively light in terms of traffic and can be boarded without pushing.

Well the scene is exactly the same-you still get pushed.

This amazing conditioning is a results of years of experience and hardships that commuters face at the station and the herd mentality that disables independent assessment of space inside the train and makes everyone push hard irrespective.

Pavlov’s Dog’s had developed a similar conditioning of rewards and punishment. They would salivate as soon as an assistant would enter the room in the expectation of food.

Salivation, Pavlov noted, is a reflexive process. It occurs automatically in response to a specific stimulus and is not under conscious control. However, Pavlov noted that the dogs would often begin salivating in the absence of food and smell. He quickly realized that this salivary response was not due to an automatic, physiological process but was a learned behavior.

We, the Investors

Imagining arbitrary linkages is a common human behavior. We all know of that one friend who would study in one specific location because of the belief that studying at that location helps get better grades.

Its’ illogical and arbitrary, however, that’s classic human behavior for you.

Newspaper headlines declaring phenomenal returns, a neighbor, a friend or a relative making a killing in the markets initiates the “salivation” conditioning.

This gives rise to irrational behavior.

Knowing fully well that high returns in previous short/medium-term period is actually a pre-cursor to lower near/mid-term future returns, investors still go ahead and take investing decisions losing their shirt in the bargain.

Of-course often investors rationalize by telling all and sundry that we are long-term investors and understood the risk very well before investing and don’t mind losing some money as we have confidence in the long-term story-so on and so forth.

“When markets correct, people are left feeling like Pavlov’s dogs; wondering why the meal which was promised did not follow”.

Exuberance and Panic

Often investors come all guns blazing ready to invest at the end of a terrific year or increasing allocation to the best performing asset-class and panic when the market goes down.

Often such investors’ stay invested hoping for recovery till its too late as they have lost a lot and then they not only exit just as market is readying to recover, but even are scared, for a long-time to return.

Psychologists describe this as fallout of the negative memories triggered by the brain during times of stress as also the inability to exit till original investment has been recovered.

Follow the Course

As the legendary investor John Bogle said “Follow the course”-The best way to protect against irrational exuberance and panic.

However for that to happen you got to have “THE COURSE”.

Taking help of a qualified advisor, creating a plan and staying on it through a well-thought out “asset-allocation” approach is key to investing success.

Following random tips, chasing best performance and returns, trying to time the markets on the other-hand are distractions that one needs to avoid