Premium Value Investing NewsletterDownload Free Issue

Weapon of Mass ‘Temptation’ that Destroys Stock Market Investors

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?

Print Friendly, PDF & Email

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.

Comments

  1. Atleast this Annual Report was worth more than the last traded price of Rs 4/- 😉

  2. Venkateshwaran says:

    Very well written article, I will preserve it and read it often. Images are very good nice collection. Thank you Sir for such a fine advice.

  3. vishal,
    from the balancesheet, it never looks so attractive..
    definitely wouldn’t have touched this…secondly if had position, definitely would’ve come out…
    as i sense there is 3 bombs ticking in the balancesheet..
    1. huge increase in secured loan …reflection of its usage not seen
    2. huge increase in sundry debtors position…
    3. huge increase in current liabilities…indicating strain in working capital position.
    really thank you so much vishal, for bringing out the hidden mysteries…

  4. Ashutosh Kaul says:

    I don’t know whether this would be termed as Vividness, But I think the news channel with their analysis and 20-20 attitude can also be called as vividness. I have bought couple of share on their so call analysis and then got trapped, booked loss on those and taken a oath not to enter in those business without doing due diligence.

    • Hi Ashutosh, yes you are right about the vividness in the way business channels present stock ideas. I captured the same in the example of vociferous new anchors above.

      Great to know that you’ve separated yourself from that vividness.

  5. Manish Sharma says:

    Hi Vishal,

    You meant someone really got interested in the stock merely due to flashy images (pun intended!) of the annual report!!???

  6. Jalaj Karandikar says:

    Well written article, love to read ur article, every time it helps me see market with a different and meaningful perspective.

  7. Dear Vishal,

    Let me accept the fact that I have lost lot of money in quite a few stocks going by the research reports and the facts presented to me (eventhough I paid for those research reports) that they are worthy stocks and further recommended to avearge down whenever it went low. Some of the stocks to name are as follows (just for the benefit of the readers):

    Allied Digital – Stated as strong fundamentals, Intel has picked stake, Unique services, tie-ups with multi national, strong growth rate, ROE, FII interest etc.- Stock fell from 225Rs. or so to Rs. 18 now at 26. My loss was around 2Lacs. Infact when there was a raid, the message is spread that it was only a routine verification and it is opportune time to buy this stock. No change in fundamentals. Company announces a buyback.

    Deccan Chronicle – Strong player in A.P, Growth will add to ADV revenues, Odyssey will add value, Deccan chargers will be a Huge potential to the stock, Higher promoter holding and buy back etc. – Stock fell from 160 to 28 and now at 33. Cash value of the stock is equal to the market value etc. My loss was 1 Lac.

    Deccan Chronicle – Strong player in A.P, Growth will add to ADV revenues, Odyssey will add value, Deccan chargers will be a Huge potential to the stock, Higher promoter holding and buy back etc. – Stock fell from 160 to 28 and now at 33. Cash value of the stock is equal to the market value etc. My loss was 1 Lac.

    C&C Construction – Strong player in Bihar and Afghanistan, High Margin Project, good execution capability etc. Stock fell from 225 to 60 and now at 60. My loss was 60K.

    Similiarly ESS DEE Aluminium – From 450 to 133, My loss was 80K.
    Dishman Pharma – Loss of 50K, IVRCL – Loss of 80K, Lakshmi Energy – loss of 140K, Nucleus Software – loss of 75K, Sintex – 150K, SREI Infra – 60K.

    Also there are MIC Electronics, Bartronics, and so on.

    Although I used a paid service of reputed and ethical Independent Analyst (I.A), I alone was the loser and the losses were mainly due to the obvious reasons mentioned in your article. I did avearge down on the basis of further reports or specific recommedation from I.A. that turned out to be a fatal mistake from my side. Though I followed the rule of not exceeding 5% limit on a particular stock investment. I did not save me from individual high value losses.

    I have now changed my habit albeit after suffering huge losses. For the benefit of readers, in order to share my experience with fellow readers I share the following:

    1. Never buy a stock without knowing about a company and basic knowledge of fundamental analysis (atleast to the extend you understand).
    2. Never buy a stock based on Stock research reports (paid or unpaid). It can at best only a starting point to filter out shares and it should never be a basis for investing in it.
    3. Never buy a stock based on the fact that a stock has fallen by 90% it should be cheap. (e.g Deccan chronicle or Allied digital). Cheap can become cheaper and may not exist to trade.
    4. Never invest in an hot IPO or hot sector (Reliance Power / Facebook IPO or Infra in 2008, although I did not invest in both).
    5. Never listen to stock analyst on TV channels and act upon its recommendation (you can still see recommendations made in Suzlon, GVK’s).
    6. Never buy a small and mid cap stock (however attractive it may be) unless you have scrutinized it so thoroughly and understand it without any doubts. At best don’t buy it when you cant afford it and also don’t buy it when you can afford it.

    • Wow Ajay, your comment took me back to the past few years where I saw exactly the same stocks being recommended by analysts/business channels…and for exactly the same reasons! It’s sad to see people being forced into such traps, and then forced to average believing that that is the only way to come out of such situations.

      By the way, the 6 lessons you mentioned at the end of your comment are real gems…especially because these lessons have been learnt the hard way.

      This has given me the idea of creating a page on Safal Niveshak, where such amazing investing lessons can be captured from long time investors like you (also like Mr. Chandrashekar had posted his lessons of the last 30 years in a recent post). That would serve as a great learning resource for new investors.

      While everyone is after lessons from Buffett and Graham, it is the lessons that we learn on our own that count the most in our lives. And investing is no different.

      So if I have your permission, can I use your six lessons and post on that new page I’m going to create? Regards.

    • Sanjeev Bhatia says:

      Dear Ajay, Great Feedback. Over the years, I have learned that in stock market people easily gloat over their multibaggers while conveniently glossing over their duds. It takes guts to admit your folly and you that you have done so, detailing your losses “vividly” shows how matured you are now in your approach. We all learn from our mistakes but it is people like you who help others to learn from “their” mistakes. Kudos.

      One thing I have always maintained, ingrained after my due share of mistakes and faults, ki “Sawaari apne saman ki khud jimmewaar hai”. Since it is MY money, I and I alone am RESPONSIBLE for its loss. Due diligence is a must and we all know how so-called experts speak, creating lot of noise or Vividness. It has become so that if lot if people are talking about a particular scrip, you can easily say its on path to be rigged. Since you PAID for such worthy (pun intended) advice adds insult to injury. In fact the easiest thing these days is to give tips. There is a beautiful modus operandi to it and it is too simple and efficient. Maybe I will explain it to Vishal and let him do a separate post on tips.

      Best Wishes.

  8. Mansoor says:

    OMG, that annual report is for real. When I first saw the balance sheet, I thought you made it for fun. When I opened the pdf in the link, I am speechless. What a brilliant way to fool someone.
    Never heard of “vividness bias” as a word before but has fallen into this trap quite a lot of time. I have always felt that the US Polo Assn shirt is always better than the Peter England or similar price tag shirts. But it’s the vividness bias I was getting into, I was looking for this word. Although, I cannot think of any stock investment that I had made due to vividness bias.
    This is a very nice article, thanks for sharing.

    • Mansoor, thanks for your feedback…and welcome to the world where reality really bites hard! Good to know that you haven’t fallen into this trap when it comes to investing, and that now you’re on guard against such bright, shiny stuff. All the best!

  9. Venkateshwaran says:

    I feel I should buy one share of Temptation foods just to get the Annual Report.It looks worse than the Kingfisher Calender, how can the Learned Board permit the use of such Pictures in its Annual Report. I do not think any of them had the time to read it.

    • 🙂 Mr. Venkateshwaran. You now know how learned the Board was. I’m sure they did such an ugly annual report on purpose, and with the thought – “Show them something (the vividness) that leads them to ignore the other things (the messy financials)”.

  10. Sanjeev Bhatia says:

    Great Post. One of the most common traps in behavioral finance.

    Like Sri said, the numbers shown above do NOT show anything beautiful (just exploding Debt without any reasonable explanation would have made me run for cover – but again, it was not about numbers, right?). But then, it seems the balance sheet is designed just like the way their photographs are.. what they reveal is suggestive, but what they CONCEAL is VITAL.

    Very Nice Post.

    • You said it all, Sanjeev! All vividness seen in stock markets (also like the stock price charts I showed above) are intended to reveal what is suggestive (and conceal what is vital)…and that is where investors lose their sense of rational thinking.

  11. karthik says:

    once again a thought provoking one.. How can one analyse the balancesheets of Banks, Financial Companies, Home Finance etc..
    seems u have to follow different approach here…

    • Thanks Karthik! Yes, there is a different approach to analyzing a bank’s financial statements…but I won’t be able to help here as I still need to learn it myself. 🙂

  12. vikrant says:

    Oh Oh Oh got some old memory back to my mind, I really Hope that all the new folks that are getting into Stock market read all of your post and learn from them, When i started my investment journey i fell in trap of many vividness. Although i was building my Stock portfolio on one side, good quality stock i was tempted by the rise in market and stories that were playing around, So i jumped in the band wagon started trading and lost all my good quality investment ( the broker sold them all cause i was in loss in my trades). This was two years back and since then i never traded again. even after that i was feeling like getting into trading, hence what i did is to cancel my margin facility completely. i could never trade cause i didn’t have the money.

    So the pivot point is its very important that we learn from others mistake, cause when you make the mistake and learn out of it sometimes it can be very very painful and dangerous.

  13. This is precisely why I directly jump to Operating Cash flow in the cash flow statement. If its negative, I close the report. No need to waste more than 20 seconds on such companies.

  14. Reni George says:

    Dear Vishal
    You are right,just to check out about vividness,i opened the annual report, and you are right about vividness,its created till page 45 out of the 100 pages of Annual report.Unnecessary glossiness and story form the part.Just to explain your company’s name you move into a story which is not at all relevant.Another part of vividness is with the stock price comparison with the sensex movement.I always doubt companies where the promoter holding is at a dangerously low level.If a promoter can not believe in his company,then i should not touch it with a stick.You will find minimum related data in the annual report, these structure helps in creating vividness.

  15. RJ a new vividness bias for the small investoers these days i guess.

Trackbacks

  1. […] you are! In taking care of all the other biases in the world – confirmation, anchoring, herding, vividness etc. – you forget to remove the “I love this company” bias, and this shows in your valuations […]

  2. […] quarters is very recent and it’s easy for us to recall that straight away. Combine this with the vividness provided by business channels and experts telling you day in and day out what’s great or bad about the company and that makes […]

  3. […] quarters is very recent and it’s easy for us to recall that straight away. Combine this with the vividness provided by business channels and experts telling you day in and day out what’s great or bad about the company and that makes […]

Speak Your Mind

*