Have a look at this balance sheet…but first stop looking at the left side of the image. 🙂
Well, if you can’t read the numbers above and want to have a “better” look at the complete annual report of this company, click here to see…but please come back to this post soon! 😉
“Isn’t it an amazing annual report?” This is what an ex-colleague asked me showing this annual report sometime in 2009.
In fact, he had invested a large amount of money in this company after going through this annual report!
The stock was then trading at around Rs 40, after having dropped 90% from its highs of June 2008.
This colleague was not alone in getting mesmerized by the annual report. Here is what a friend told me, “This seems like an amazing company. Just see its annual report. And the stock is already down 90% from its top. I think it’s a great buy at this price.”
“I’m not sure about that, but I think the mentality of the promoters is nauseating!” I said, “But yes, it has impressive ‘disclosures’!” I laughed while holding my stomach.
Anyways, that friend, as he later revealed, had also bought the stock at around Rs 40. He still holds it, but isn’t interested in talking about it anymore.
Why? See the stock’s price chart at the end of this post. After falling 90% from its June 2008 highs, and from the price my friend and the ex-colleague bought it at, the stock fell another 90% till trading in it was suspended due to charges of price manipulation by the company’s promoters!
Of vividness and temptations
There are some human tendencies that work against us. One of them is known as vividness bias, which describes how people are often influenced by what’s loud and in their faces.
Here are some examples of vividness bias at work in our daily lives…
You go to a restaurant promising yourself that you are going to eat something healthy, and then you see this on the adjoining table. All hell breaks lose, and when you come out of the place, you are guilty for having stuffed yourself with calories. But the vividness bias has already done the damage.
A large number of people stopped travelling by air just after the September 2001 attacks in the US. This is despite the statistics that more people die out of donkey attacks than air crashes or terrorist attacks. But images like this created that vividness, which influenced people to avoid air travel for some days.
Rash drivers are more likely to get influenced and slow down (at least for some time) when they see crashed cars like these. In fact, the impact of such images is far greater than the “Drive Slow” boards that cover the entire highways.
People were extremely fearful of moving out of their houses after the 2009 swine flu outbreak. Images like these that filled television and newspapers added massively to the fear. This was despite the fact that more people die of seasonal flu every year than the lives swine flue had claimed. But then, it was the latter that was “in your face” kind of stuff.
Research studies suggest that doctors who look at x-rays of smokers tend to smoke less, or don’t smoke at all. The mess in the lungs they see acts as the influence here.
Floods claim thousands of lives across India every year. But none get so much publicity as the Mumbai floods of July 2006. I was one among these stuck in the flood, and was fearful for the next few days whenever it rained heavily.
There are some who want the the world to dare to dream through their flashy ways and empty promises. But they create such vividness around themselves that the world gets influenced, even if to fall in the trap later.
You must have seen how some anchors act and talk on news shows. Sheer display of authority and influence. Influenced by their vividness, you just tend to believe them at times.
The ubiquitous photo of Harshad Mehta alongside his Lexus influenced the small investor to dream of a life of luxury just betting on short term movement of stock prices. Some people are still paying the price of that greed.
“Sensex at 20,000” wasn’t just celebrated in the studios of business channels. There were scenes of celebration everywhere, as if India had placed its man on the moon. I then saw people betting their houses for stocks when the Sensex touched 21,000!
I won’t say anything about the following image. Just that this was clicked at Reliance Power’s listing, and a lot of people I know were clued to the television to see the share price double on this day. This was “India’s biggest IPO” after all.
Now, here are some stocks where thousands of investors have suffered from vividness bias, and have paid heavy prices for getting influenced by the same…
Moral of the story
As an investor, watch out for stock stories that are “vivid” and entice you to believe them as soon as you hear them.
Vividness can attack you from anywhere and everywhere, like when you see…
- Bright, flashy annual reports.
- Huge corporate headquarters.
- A CEO who spend more time with skinny models and racing cars than their employees and shareholders.
- A company that boasts a lot about the corporate governance award it just won.
- Analysts claiming that, “like the past 5 years, stocks will continue to earn you 30%+ returns per year over the next 5 years”.
- A financial advisor promising to help you reach your “financial freedom” (see the vividness in this term – financial freedom) much faster then you would have done it yourself.
- A friend suggesting you a “stock that has risen 50% over the past six months”, and claiming that “this is going to be the next Infosys“.
- Investors losing faith in a wonderful business just because its stock has “lost 50%” in a stock market crash.
The way you can protect yourself (and your money) from faltering in the face of vividness bias is to step back from the hype that is set to influence you to act…
…and instead be unemotional to study the “facts” behind the story before taking your investment decision.
When it comes to investing (especially in stock market), vividness bias can lead you to big mistakes of commission (buying the wrong investments just because there is a hype surrounding them).
But you must avoid getting charmed by that vividness.
Try to go behind the beauty of that vividness, and scrutinize the story to see if it is really so bright and beautiful.
In other words, you need to get past the “bright and shiny” stuff that surrounds rising (or falling) stock prices (and hyped companies) because it’s easy to fall into the trap of looking at the chart and believe, “Hey, this stock has doubled in one year. It’s a gem!”…or “This stock has crashed 90%. It’s a dud!”
Use vividness bias to your advantage
With regard to planning their financial lives, people fail to save what they need to. This failure may be due in part to the inability of people to make effective choices about events that will occur at different points in the future.
It is here where the vividness bias can be of great help to you…if you are avoiding “seeing” your financial goals and achievements that lie 15-20 years down the line.
For instance, a vivid perception of your financial future – like imagining yourself compromising on your daughter’s marriage because you don’t have adequate savings – could push you towards saving more money every month than you are doing now.
A vivid perception of retired life – imagining yourself living happily because you have enough money in your bank account to see you through your golden years – could raise your confidence levels, which might ultimately lead you to set your retirement planning right stating now.
You’re getting my point, right?
Now tell me – Have you ever been influenced by vividness bias – the weapon of mass ‘temptation’ – in your stock market investing? If yes, how have you dealt with it?