Premium Value Investing NewsletterDownload Free Issue

Investor, Pay Attention

Note: This is an excerpt from the article Where Do Great (Investment) Ideas Come From, which I wrote for the May 2015 issue of our premium newsletter, Value Investing Almanack.

Consider that you are looking to buy a stock and the two that you come across on your screen are, say, Company A and Company B. Here are a few data points about the two companies, which are the only factors you would look at while making your decision. Look at them and think which one you would rather purchase –

Did you make a decision? Before you read on, jot down either Company A or Company B. Now I’m going to give you some more data points on these companies. No information has been changed, but some has been added.

Which stock would you rather purchase now? Again, write down your answer. I’m going to present the options a third time, again adding one new element.

Now, which of the two would you prefer?

Chances are, somewhere between the second and third lists of data, you switched your allegiance from Company B to Company A. And yet the two companies didn’t change in the least. All that did was the information that you were aware of.

This is known as omission neglect. We fail to note what we do not perceive up front, and we fail to inquire further or to take the missing pieces into account as we make our decision.

Some information is always available, but some is always silent – and it will remain silent unless we actively stir it up. In investing, such information that remains silent – or that you fail to notice – can be dangerous to your capital.

Consider my experience with the stock of Hotel Leela. I was in Bangalore sometime in early 2006 and visited Leela Palace to meet a friend who was attending a conference there. I was in awe of the property – it was grand, and amazingly beautiful.

On enquiring, I got to know that the hotel was one of the most expensive locations in India and was completely booked for the next few months.

The story was same everywhere – most of Leela’s properties were booked for months, despite their premium pricing.

“What an amazing business!” I told myself. “Just imagine the kind of profits these guys must be making. I must have this stock in my portfolio!”

The next day, without enquiring more about Leela’s business and financial performance, I bought the stock, expecting it to be a story that was waiting to be unveiled. My premise was – Great hotel + Premium pricing + Overbooked = Great profits.

Well, it was indeed a story waiting to be unveiled…and for me! When I glanced through the company’s annual reports after buying its stock, I saw a business that was badly managed.

The debt/equity was rising, much more cash was burned than was generated, return ratios were average at best, and the profit growth had followed a highly inconsistent path. As I included more information on the company in my analysis, I started ruing my decision to buy the stock more.

Anyways, by the time I had realized and then accepted my mistake, the stock was already down around 45% from my purchase price. But I still sold it off. And thankfully so, as the company remains in doldrums and so does the stock.

Now, my idea is not to lead you to conclude that you need to gather a world of information on a business while doing its analysis (in fact, the first 20% information will tell you 80% about the business), but it’s important to pay attention and include the most important information while doing your analysis.

Don’t suffer from inattention blindness bias, as shown in this invisible gorilla experiment.

To pay attention means to pay attention to it all, to engage actively, to take everything around us, including those things that don’t appear when they rightly should. It means asking important questions (like some I listed earlier in this post) and making sure we get answers.

Even when you do this, you may not be able to emerge with the entire situation in hand, and you may end up making a choice that, upon further reflection, is not the right one after all. But it won’t be for the lack of trying.

One of the biggest lessons I learned while reading this wonderful book from Peter Bevelin, A Few Lessons from Sherlock Holmes, was that, while analyzing situations, it’s important to not jump to conclusions and instead try to collect facts as open-minded as possible.

As Mr. Bevelin quotes Sherlock Holmes…

No one can give rules for methods of thinking but it is possible to carry certain principles into operation. One is to strive to be delivered from hasty judgments.

“Men see a little, presume a good deal, and so jump to the conclusion.”

How common this is needs only a little study of our mental processes. In some this is a habit, in others a fault of education.

So the takeaway for you is to observe to the best of your abilities and never assume anything, including that absence is the same as nothing.

Note: This was an excerpt from the article Where Do Great (Investment) Ideas Come From, which I wrote for the May 2015 issue of our premium newsletter, Value Investing Almanack. To read the complete article and issue, please click here to subscribe.

Print Friendly
About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.


  1. Reni George says:

    Dear Vishal

    Good Morning to you

    This post of yours means that we all suffer from “The Framing Effect”.We take take decisions based on minimal data,because we tend to make it easy to reach at a decision.I would like to give you an example from my life,which shows that how we lose out on good things also due to the framing effect.

    One of my friend received a marriage proposal,he was from a modest background, a Diploma Engineer,ans was trying to setup his own business.The girls father rejected the proposal saying that,the boy was just a diploma,he did not have a steady income,he was not having a job.

    Now after seven years,the boy is a successful businessman,is a distributor for a major engineering company,travels around the world in search of new avenues,has earned enough,that even if he decides today to retire from active work,he could easily carry on his life from the passive incomes,from the investment that he has made.

    Now if we look back at the girl’s dad’s decision,he had framed it just by looking at some visible factors,he did not dig deep into,he could not see that the boy had a nice habit of saving money,his spending habit were minimal,he was a great at building relations…etc etc,,

    So this mentality works out in normal life,and when it gets spilled into our investment behavior,we may never know.In any case people want their rewards to by like a two minute noodle.So it is bound to happen.

    Anyways nice writing ..keep it up

    Thanks and Regards
    Happy Knowledge Sharing

    Reni George

  2. If I was in the girl’s father’s place, I would have seeked time to reply back on the proposal’s acceptance or rejection. Depending on the time factor, I would have atleast taken 3 or 5 proposals into consideration, taken time to reply & then did my research & home work on the grooms backgrounds in detail.

  3. Anil K Kapoor says:

    Dear Sir,

    This refers to your tweet today. Every senior professional investor will agree to the following three points

    A. Shall I invest in shares with borrowed money? NO
    B. Long term equities give highest returns in all asset classes.
    C. Interest on borrowed capital is always less than the returns from Equities.
    I also understand if leveraging is used wrongly it can result is double losses and at double the speed.

    Then the question is why NO is the answer for question A.

    I am thinking of taking a 15 year LAP of about Rs 75 lakhs and investing Rs 50 lakhs in equities. It could be even through an SIP route @ Rs 1 lakh pm or Rs 50K pm. It could be Equity MFs too where I have studied the last 15 years industry performance. I understand past performance is no indication of future but an agile investor can always see when a particular MF is going down and shift. If I am looking for long term then I am not bothered by temporary market ups and downs.

    Rest of 25 lakhs to be invested in a business. Installments for the loan to be generated from the business.


Speak Your Mind