I am in Chennai for my Value Investing Workshop that happened yesterday.
After my session, I went to meet a friend in the evening. His residential society had organized a bicycle race for kids. I saw more than 50 kids out there jostling for space meant for not more than 10 cyclists. Worse, most of them were without a helmet.
Now, letting your child cycle without a helmet may be ten times riskier than feeding him a course of dangerous non-steroidal anti-inflammatory drugs. And a thousand times riskier than flying in an airplane.
Moving in the front seat of a car without a seatbelt (which most people, especially teens, do when the policeman is not watching) is hundred times riskier than many common and ‘scary’ diseases in India, like swine flu.
Yet we obsess about the low probability events and take big chances with the high probability ones. Why?
First, we don’t understand probabilities well. Two, we often don’t care about the consequences.
Like in investing, we obsess about the daily volatility in stock prices, even of the high-quality businesses we may own, but ignore the fact that buying and owning low quality, risky, fragile businesses often have terrible long-term consequences.
We would rather overpay for stocks we don’t understand but just because everyone is making money on them and because everyone expects to continue to make money on them, than understand the consequences of such expectations not meeting reality (look no further than what’s happening in the banking and NBFC space now).
We would rather sell our winners because we are afraid of losing on the paper gains, but would continue to hold on to our losers because we can’t readily accept that we had made a mistake in buying them in the first place.
Now, we can shake our heads and insist that investors, parents, and other people get more rational, or we can understand that this is human nature. That we would never change.
And only hope that constantly meditating on such irrationality may help us minimize the side effect of the wrong things we are afraid of.
Being afraid often keeps us safe. But we should rather be afraid of the things and events worth being afraid of, like helmetless kids, driving without seatbelts, and buying risky, fragile businesses, and worse overpaying for them.
Well, I am about to board my flight from Chennai, and I am afraid of flying. Irrational, you see!
Amit Kumar says
Such a beautiful message and informative too. Thanks for sharing!