Investing Behaviour

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The Internet is brimming with resources that proclaim, “nearly everything you believed about investing is incorrect.” However, there are far fewer that aim to help you become a better investor by revealing that “much of what you think you know about yourself is inaccurate.” In this series of posts on the psychology of investing, I will take you through the journey of the biggest psychological flaws we suffer from that causes us to make dumb mistakes in investing. This series is part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund.

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We all have a natural instinct to protect ourselves from admitting we’re wrong.

Whether we make a mistake that hurt someone, cost us money, or just made us look foolish, saying, “I messed up,” doesn’t come easily to us.

In fact, the bigger the stakes, the harder it is for us to face our mistakes head-on. In such situations, we go into a defense mode, trying to justify what we did rather than accept the truth.

[Read more…] about The Psychology of Investing #5: What’s Your Internal ‘Yes-Person’ Saying?

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Investing is a lot like riding a bicycle for the first time. You start off feeling wobbly, unsure of what you’re doing. Every little bump feels like it’s going to throw you off. You hold your grip on the handle too tightly, overreact to every movement, and fall a few times. But if you stick with it, you slowly find your balance.

You ultimately realise it’s not about avoiding every bump but learning how to roll through them without crashing.

Over the years, I’ve had my fair share of crashes in the investing world. Some left me with bruises (mostly to my ego), while others taught me lessons I wouldn’t trade for anything. Some time back, I shared some of these lessons on Twitter—simple truths for both new and experienced investors that might help make the journey a little smoother.

This isn’t some definitive guide or magic formula. Think of it more like a list of signposts—reminders that might help you find your balance, especially when the market gets rough.

Whether you’re just starting out, or you’ve been riding the investing bicycle for years, I hope these lessons help you stay steady when it matters most.

Here they are.

[Read more…] about 20 Timeless Lessons for Young and Old Investors

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The Internet is brimming with resources that proclaim, “nearly everything you believed about investing is incorrect.” However, there are far fewer that aim to help you become a better investor by revealing that “much of what you think you know about yourself is inaccurate.” In this series of posts on the psychology of investing, I will take you through the journey of the biggest psychological flaws we suffer from that causes us to make dumb mistakes in investing. This series is part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund.

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Niels Bohr, the Danish physicist who made foundational contributions to understanding atomic structure and quantum theory (for which he received the Nobel Prize in Physics in 1922), once proposed that the goal of science is not universal truth.

Rather, he argued, the modest but relentless goal of science is “the gradual removal of prejudices.” We start with grand ideas about the world, but as science advances, these ideas are broken down, and we realise we’re left with fewer certainties.

Take Copernicus’s discovery that the Earth revolves around the sun. It gradually removed the prejudice that Earth was the centre of the universe, shattering an age-old belief that had once seemed unshakable. Or Darwin’s theory of evolution, which gradually removed the prejudice that humans were a special creation, separate from the rest of the species. We had to rethink everything about our origin.

Newton’s discovery of gravity gradually removed the prejudice that objects were attracted to the earth because it was in their nature to do so. Then there’s Louis Pasteur’s discovery of the germ theory, which removed the prejudice that infections and diseases were somehow a result of divine punishment rather than the activity of microorganisms.

Then, much later, Daniel Kahneman and Amos Tversky dismantled another cherished assumption — that humans are rational animals. Their research on cognitive biases showed that our choices aren’t always logical, especially in areas like investing. Their work on behavioural economics and human irrationality gradually removed the prejudice that humans make financial decisions based on reason.

These shifts are more than facts. They’re complete overhauls of how people understood life and the world around them. And they weren’t quick; they took decades, even centuries.

Now, even when you move beyond science and look at life in general, being a lifelong learner serves a similar purpose – that of the gradual removal of prejudices we carry in our minds and the lenses with which we see and judge situations and people around us. We all start with our beliefs, moulded by family, culture, and experience. But it’s only by opening ourselves up, by being humble enough to unlearn, that we start to shed these layers of preconceptions.

I have lived with and suffered through several prejudices over the years, which were dispelled one after the other as I walked on my journey of lifelong learning. Every single time, I thought I had a clear understanding of something, only to later discover my grasp on it was incomplete or even completely wrong. And I know this process won’t stop.

Every time I started believing I knew how the world was, the world showed me more and more ways in which I was wrong.

I learned that I was wrong about what things are. The things I took for granted as “the way things are” were just one way to see them.

I learned that I was wrong about how things work. Even in fields I thought I understood well, there were layers of complexity I was blind to.

I learned that I was wrong about who people are. You meet someone and form opinions. And then time and experience reveal the many shades and stories that make them who they are.

When I started my investing career in 2003, I held onto a set of beliefs without questioning them. I believed:

• What Gordon Gekko said in the movie Wall Street, “I don’t throw darts at a board. I bet on sure things.”
• That greed was indeed good, and that success required a certain ruthless, profit-driven mindset.
• That stocks were blips on the ticker, just numbers to be bought low and sold high, rather than pieces of actual businesses.
• That the only thing that could help me succeed as an investor was my skill in stock picking—the ability to find that perfect stock that would make it all worthwhile.
• That making money from stocks required me to just be rational in my analysis.

These prejudices were gradually removed as I read and learned from Graham, Buffett, Munger, Fisher, Taleb, Kahneman, and others who approached investing as more than just a game of numbers. These thinkers challenged me to think beyond returns, to understand the nature of risk, and to see investing as a way to build sustainable wealth, not a quick win. Over time, I came to realise:

• There are no certainties in investing, only uncertainties.
• Greed is not good for an investor, and neither are fear and envy. These emotions cloud judgment and lead to impulsive actions.
• Stocks are representative of businesses, and to do well, I must think and act like a business owner.
• Investing is largely a game of luck, and that skill shines through only in the long run. Short-term wins can easily make you feel invincible, but it’s often just randomness giving you a temporary boost.
• Making money from stocks required much more than rational analysis; it needed emotional discipline and a great control over my behaviour. You might know the theory, but in the heat of the moment, emotions take over.

After 20+ years of being an investor and learner, I still have my prejudices and continue to look at the world with my own tinted glasses. And I am sure that will continue till I have my thinking faculties working intact (for it’s our prejudices that make us humans). No matter how much we learn, our biases never disappear; they only become quieter, easier to spot.

But as I continue my learning journey and keep unburdening myself with parts of my ego and blind spots, I also believe that I may see a greater light coming from the end of the tunnel of my ignorance. Learning doesn’t make us perfect thinkers; it just pulls back a few more layers, one at a time. And that possibility—that learning can clear a bit more fog—is what keeps me going.

I may never see things completely without bias, and maybe I’ll never truly “arrive,” but I believe I’ll become less prejudiced.

My life and thinking may get better, little by little, as I unlearn and relearn. And if you’re anything like me, I believe the same for you too.

Just keep learning.

The purpose of this series is to help you gradually get over your own prejudices and become a better investor. Each step forward clears a bit of that fog, bringing clarity to both life and investing.

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Disclaimer: This article is published as part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund. All Mutual fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (‘RMF’). For more info on KYC, RMF & procedure to lodge/ redress any complaints, visit dspim.com/IEID. Mutual Fund investments are subject to market risks, read all scheme related documents

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The Internet is brimming with resources that proclaim, “nearly everything you believed about investing is incorrect.” However, there are far fewer that aim to help you become a better investor by revealing that “much of what you think you know about yourself is inaccurate.” In this series of posts on the psychology of investing, I will take you through the journey of the biggest psychological flaws we suffer from that causes us to make dumb mistakes in investing. This series is part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund.

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The Art of Thinking Clearly is an excellent book by Rolf Dobelli. In one chapter, Dobelli shares a couple of instances –

Every day, shortly before nine o’clock, a man with a red hat stands in a square and begins to wave his cap around wildly. After five minutes he disappears. One day, a policeman comes up to him and asks: ‘What are you doing?’ ‘I’m keeping the giraffes away.’ ‘But there aren’t any giraffes here.’ ‘Well, I must be doing a good job, then.’

A friend with a broken leg was stuck in bed and asked me to pick up a lottery ticket for him. I went to the store, checked a few boxes, wrote his name on it and paid. As I handed him the copy of the ticket, he balked. ‘Why did you fill it out? I wanted to do that. I’m never going to win anything with your numbers!’ ‘Do you really think it affects the draw if you pick the numbers?’ I inquired. He looked at me blankly.

[Read more…] about The Psychology of Investing #3: When Control is Just An Illusion

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Imagine explaining why a leaf fell from a tree at 3:42 PM on a Tuesday.

Was it the wind? The age of the leaf? A butterfly flapping its wings in Kashmir?

In reality, it was most likely a combination of multiple factors, many too small for us to even notice.

Well, every movement in the stock market is like that leaf, but infinitely more complex. However, here we have a story for every leaf falling.

[Read more…] about The Dangers of Storytelling in Investing: How to Avoid the Narrative Fallacy

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There is a quirk in human nature that is as old as time itself. Yet, it is as relevant today as it was when our ancestors first started trading seashells.

I am talking about the tendency to see the world through rose-coloured glasses when it comes to potential gains, while simultaneously downplaying the very real risks that lurk in the shadows.

Now, this not just a passing academic observation, but a force that affects not only our everyday lives but also our economies and even the path of history. And it is worth pausing to think about how it might be affecting your own choices, big and small…in life, investing, everywhere.

[Read more…] about The Optimism Trap: How We Misjudge Risk and Rewards

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The Internet is brimming with resources that proclaim, “nearly everything you believed about investing is incorrect.” However, there are far fewer that aim to help you become a better investor by revealing that “much of what you think you know about yourself is inaccurate.” In this series of posts on the psychology of investing, I will take you through the journey of the biggest psychological flaws we suffer from that causes us to make dumb mistakes in investing. This series is part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund.

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Imagine you are one of our cave-dwelling ancestors, minding your own business, when suddenly a tiger appears. Do you –

• Carefully weigh the pros and cons of running vs fighting?
• Calculate the statistical probability of survival based on past tiger encounters?
• Scream and run faster than Usain Bolt?

If you chose C, congratulations! You are alive (well, your ancestors were), and you are also the proud owner of a brain that is about as well-suited for modern investing as a hammer is for performing brain surgery.

[Read more…] about The Psychology of Investing #2: How Evolution Wired Us to Fail at Investing (And What to Do About It)