Here is what a Safal Niveshak tribesman, Sanjeev Bhatia, wrote in the latest Facebook Jam last Saturday (sorry Sanjeev, but it’s your turn to claim the fame ;-))…
I have a particular Behavioral Problem. You recently wrote somewhere that pain of seeing your picks down 15% is more intense than pleasure of seeing your picks go up 15%. But in my case, it seems to be different. I am now seeing BHEL going up to 232 level, did not buy at 200 because my buy price was 180. Opto Circuit, my buy price was 140, it bounced back from 147 to 155…and with market going up and in strong upward momentum, it does not seem likely to come down soon although you can’t say that with certainty in this market. How to let go off this “being left out” syndrome?
What Sanjeev thought, and as I understood from his question, was that he was suffering from a “unique” behavioral problem – something like the “Alice in Wonderland Syndrome”, which is a neurological disorder that can effect a person’s perception.
But then, as I mentioned in the jam, and experienced investors would vouch for this, is that Sanjeev suffers from nothing more than a “common cold”, like most of us investors.
This common cold, in terms of behavioral finance, is known as the “regret aversion bias”, or “action paralysis”, where an investor does not act because of the potential fear he or she remembers from prior experience.
Like in Sanjeev’s case, he might’ve feared that BHEL would continue to fall after he bought it and he didn’t wanted to regret his decision (regret aversion)…though in his case it was more to do with “risk aversion”, or his discipline to not buy stocks above intrinsic value.
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Nobody loves a loser
Here is what Jason Zweig wrote in his “Your Money and Your Brain”…
Imagine that you can choose between winning $3,000 for sure, on the one hand, or a gamble with an 80% chance of winning $4,000 and a 20% chance of winning nothing. If you’re like most people, you will pick the sure thing.
Next, imagine that you can choose between losing $3,000 for sure, or a gamble with 80% odds of losing $4,000 and 20% odds of losing nothing. What would you do now? In this case, people reject the sure thing and take the gamble 92% of the time.
You would be better off taking the gamble in the first example and the sure thing in the second one–the opposite of what you probably chose. On average, an 80% chance of winning $4,000 is worth $ 3,200 (.80 x 4,000 = 3,200). So, in the first example, the gamble has an “expected value” $200 higher than the sure thing. By the same rule, an 80% chance of losing $4,000 leaves you $3,200 poorer. An in the second case, you logically should favor the sure loss of $3,000; on average, it will leave you with $200 more.
But it’s hard to be strictly logical in these choices, because the idea of losing money triggers potential regret in your emotional brain. If you take the 80% gamble of winning $4,000 and win nothing instead, you will kick yourself for missing out on the $3,000 sure thing. And a 100% chance of losing everything feels a lot worse than the risk of an even bigger loss coupled with a small shot at losing nothing. Doing anything – or even thinking about doing anything – that could lead to an inescapable loss is extremely painful.
What’s your regret?
“Sometimes I wish I could turn back time.
Impossible as it may seem.
But I wish I could so bad, baby.”
~ Backstreet Boys
Regret is a negative emotion that we experience when realizing or imagining that our present situation would have been better, had we acted diﬀerently.
It is an unpleasant feeling, associated with self-blame, the wish to undo the regretted event and a strong tendency to kick oneself.
Like you must have kicked yourself for some (or all) of these things in the past…
- I should have caught this stock when it was low.
- I knew this stock was going to rise.
- If only I had followed my signal, I would’ve avoided this disaster of a stock.
- I knew the markets were too expensive in 2008, but I failed to act.
- I knew stocks were for the taking in March 2009, but didn’t act.
Now if you read these statements carefully, beneath every point of regret lie what behavioral scientists call “hindsight bias” – or the exaggerated sense of predictability in retrospect.
So the reason Sanjeev is regretting his decision to not buy BHEL and Opto Circuits is most likely due to the hindsight bias he (like most investors) suffers from – that he “knew” that BHEL and Opto Circuits were going to rise.
By the way, another bias Sanjeev suffers from is ‘recency bias’, which we recently discussed in the “Return of Uncertainty” presentation.
You can know this from his statement – “…with market going up and in strong upward momentum, it does not seem likely to come down soon although you can’t say that with certainty in this market.”
Anyways, let’s focus here on just the “regret bias” and keep the other biases aside (not you, Sanjeev!)
Here is how an investor “regrets” at various levels of a stock, just because his “hindsight” tells him that he was foolish to be sitting tight…or in Warren Buffett’s language – “sucking his thumb”.
Data Source: Ace Equity
By the way Sanjeev, if you are feeling wrecked at knowing how bad your situation is by not acting on your gut that told you to buy BHEL, take hope from what Buffett has to say on the “regret” of missing out on opportunities (which he calls “mistakes of omission”)…
We’ve made lots of mistakes, but they don’t bother me. We’ve had no regrets. We are in the business of making many decisions and there are bound to be mistakes.
In my personal life, there are always things I could’ve done differently. But so many good things have happened. It just doesn’t pay to dwell on the bad things. Finding the right spouse is 90% of it. If you are lucky on health and lucky on your spouse, you are a long way home. Getting turned down by HBS (Harvard Business School) was one of the best things that could have happened to me (because Buffett then got a chance to study under Benjamin Graham at Columbia), bad luck can turn out to be good.
Wait, here’s one more from Buffett…
The most extreme mistakes in Berkshire’s history have been mistakes of omission (noy buying a great stock). We saw it, but didn’t act on it. They’re huge mistakes – we’ve lost billions. And we keep doing it. We’re getting better at it. We never get over it.
And here’s a final one…
You’re going to make mistakes. You can’t play in the game without making any mistakes. I don’t think about it, I just move on. Most business mistakes are irreversible setbacks, but you get another chance. There are two things in life that you don’t get another chance at – marrying the wrong person and what you do with your children. Business, you just go on. It’s a mistake to dwell on mistakes, it’s unproductive. It’s like Mark Twain’s story about the cat that sat on a hot stove – he never sat on a hot stove again, but he never sat on a cold one again either.
The gist of the story is that questions like – “How could I miss BHEL when it was so low?” or “How could I let BHEL slip from my hand?” – make no sense in hindsight, as the answer was not so obvious when you made the decision (remember, not to decide whether BHEL was a ‘buy’ at Rs 200 was also a decision).
What is more, if Sanjeev is not able to keep this “regret” aside, he call fall into what is known as the “mistake of commission”…by buying BHEL as soon as it falls back, and not to his “buy price” of Rs 180, but to Rs 200 that is now “anchored” in his mind.
So, here’s another bias called “anchoring bias”, which could lead Sanjeev to either…
- Refuse to buy BHEL today at Rs 230, just because he has recently seen the stock “cheaper” at Rs 200, or
- Buy BHEL as soon as it falls to Rs 200, just because he has recently seen the stock “expensive” at Rs 230.
You must notice how our brain leads us from one behavioral pitfall to another, and that is the danger of not keeping our emotions under control while investing.
Our brain is a leaking boat, so we must know how to plug the holes before it drowns us (we don’t have the option of changing our boat – our brain – with anyone else anyways!).
So Sanjeev, and all you investors out there, regrets about the past (in hindsight) are not going to lead you to anywhere, except to mistakes of commission and subsequently bigger regrets in the future.
You see, it’s impossible to invest without making mistakes of omission (that lead us to regrets), but it is possible to stop kicking yourself when you make them, so that you don’t make bigger and more dangerous mistakes of commission.
Here is a chart that explains the difference between mistake of omission and mistake of commission in a better manner.
Data Source: Ace Equity
I mean, I regret missing buying stocks like Asian Paints, Titan, and Yes Bank when these were at 10-20% of their respective current prices, despite knowing that these business had tremendous values (you see, I was sucking my thumb while being busy recommending such stocks to others).
But that must not lead me to regret that “Ah! I knew that…”, and that must not led me to buy these stocks at today’s expensive valuations.
Better safe than sorry
Here are some habits I’ve developed over the years to stop my regret to turn my mistake of omission into a mistake of commission.
Now since these habits have improved the investing life of a cynic like me, it can easily do wonders for you if you practice them with discipline:
- Admit your mistake and face it, without regret.
- Turn you loss (from omission or commission) as a lesson.
- Talk about it with someone you trust. It’s much healthier to kick your mistakes over to others, then to kick yourself in private shame.
- Have rules, and follow them come what may…like Sanjeev was disciplined with his intrinsic value calculations for BHEL, and stood his ground.
- When a stock you own gets cheap or expensive (and you know this but are feeling a bit tizzy to act assuming that the stock might fall or rise even further), get help in pulling the trigger. It is lot easier to admit that investing in a stock was a mistake if you are not the person who made the mistake.
- Cut your losses on bad stocks, but avoid “stop-losses”…for you can get sold out of good stocks taking short-term dips on their way to long-term greatness. (Plus you pay your broker an unnecessary commission). So don’t sell because the stock is dropping, but because your research tells you something is wrong with the underlying business.
- Stop looking at those stock tickers in good times and bad. When you see a stock you own tumble in real time, your regret (of buying it) magnifies. Also, when you see a stock you didn’t buy surge in real time, your regret (of not buying it) compounds.
You are not alone!
Here’s what a study on “regret” on Olympic athletes shows – Silver medalists have greater regrets than bronze medalists. Why? Because silver medalists “missed” the gold, while those who won the bronze “just missed” earning no medal at all. 😉
The mistaken feeling of being the only one with regrets can tempt you into taking investing risks you normally would avoid (Sanjeev, you are still reading this…right?).
It’s important to remember that everyone makes mistakes, and that everyone who makes mistakes has regrets.
When you make a mistake, don’t regret and call yourself ‘stupid’.
You are not stupid. You are just human!
Or life is yours to miss,
No other road,
No other way,
No day but today.”
~ Jonathan Larson
Now, as a regretful human, let us know in the Comments below the biggest regret of your investing life, and the lesson(s) you have learnt from it (if any).